Weekend Strategy Review August 27, 2017

Posted by OMS  at August 27th, 2017

The Dow finished up 30 points on Friday, closing at 21,674.  It was up 130 points for the week.  The NASDAQ was down 6 points on Friday and up 49 points for the week.

The Dow, NASDAQ, and SPX appear to have finished their large degree Ending Diagonal Patterns and are starting to head down.

Friday’s early rally was the Big Move predicted by two consecutive days of small change signals from the A-D oscillator.  The move was likely wave ‘C’ up to complete Wave 2.  Wave 3 down should be next. (See attached chart). 

Once all 5 waves of the decline complete, the Dow should be trading close to the 20,400 level.

In last week’s WSR, I talked about how the ‘Battle for the 50’ would likely be fought this week.  And that’s what we saw.  It’s still going on as the Dow is still above its 50-day moving average currently located at 21,661.  This will be a critical level for next week, because if 21,661 is broken to the downside, the next target becomes the 200-day moving average currently located at 20,665.  Then IF the 200 is broken, it would be a ‘Rope Jump’ which would identify the move as Major Wave 1 down in a new Bear Market.

This why we need to pay attention to the preliminary bouts that are going on now.  We need to start looking for impulsive action.  If we’re going to enter a Major Bear Market, we need to start seeing impulsive action on the downside when we expect impulsive waves to occur. 

So far, we’ve seen impulsive moves on 10 and 17 August.  These two moves of 205 and 274 points each, were likely two impulsive sub-waves of minor wave 1 down.  This minor wave completed at the 21,600 level.  After that, the Dow made an A-B-C retracement, which appears to have completed with Friday morning’s pop. 

I expected the wave ‘C’ rally for wave 2 to complete near the 21,900-21,950 level.  The early morning pop topped out at 21,907.

BTW, in my Comments yesterday, I talked about how I would use protective stops to take me out of the Big Move predicted by the A-D oscillator, so I could re-enter the positions at higher levels.  Those stops saved me about 60 Dow points, as I re-entered my short (inverse) positions slightly above 21,900.  If you’re a longer-term trader, you might want to ignore all these shorter-term gyrations and focus on the overall targets suggested by the patterns. 

For example, earlier in the week, I received an email from a Student who travels frequently and is unable to follow the markets on a daily basis.  He wondered if holding inverse index ETF would be appropriate for his lifestyle.  One of the things I told him was that there is no correct or perfect way to trade. It all depends on your lifestyle.  And you ALWAYS need to adjust your trading style to your life, not the other way around.  This is why I provide both short and longer-term targets suggested by the patterns. Right now, the short-term pattern suggests a move down to about 21,450.   This is where sub-wave 3 down should end.  If I’m right about the pattern, a short-term trader should be able to profit by about 500 Dow points on the move before a retracemet wave starts to develop.  

If you’re a longer-term trader, you might want to ignore all the retracement waves and wait for the Dow to reach approximately 20,400+/-.  That’s my current target for Major Wave 1 down.  If this happens, there should be a Major Wave 2 retracement, followed by a massive Wave 3 decline that will take the Dow to significantly lower levels.  Longer-term traders might want to move to the sidelines once Major Wave 1 down completes or consider trading the next Major Waves,  both up and down.

Remember, trading is part of a lifestyle. There is no right or wrong way when it comes to how frequent you trade.  It’s your life and you need to trade at the frequency and risk levels you’re comfortable with.  My Comments are only intended to help you make informed decisions on where the market is likely to go so you can protect yourself and what you have accumulated over the years.  That’s why I give you my view of the market and provide the projected targets.  How you decide to trade the market, either short-term or longer-term is entirely up to you.  I tell you what I’m doing, but at the end of the day, these decisions on how and when to pull the trigger is always up to you and your trading style.  That’s what makes trading so interesting and fun.

So, after Friday’s opening pop, I was watching for the market to stage an impulsive decline.  That’s what happened (see the attached chart).  Remember, I was expecting wave ‘C’ of 2 up to complete above 21,900, so any decline after that MUST be impulsive if it’s part of wave 3 down.  It was.

This is initial decline was followed by a small retracement rally for wave 2 into 3:30 pm.  Then once Mario Dragi, European Central Bank President, finished his speech at Jackson Hole, the market started falling impulsively again.  The final two 15-minute bars were likely the start of wave 3 down.  If this is the case, we should see more downside follow through on Monday. 

BTW, Ms. Yellen’s speech was a yawner.  She didn’t say anything about raising interest or unwinding the Fed’s portfolio, and talked mostly about how existing ‘regulations’ were good for the banking system.  Her words were probably enough to get her fired next year, as her pro-regulation policy appears to be in direct conflict with that of the current administration.

Anyhow, the waiting for something new out of the Fed and other Central Bankers is over.  Now the markets should be able to resume the path suggested by their patterns.

Next week, the first downside target I’ll be watching is 217.46 on the DIA.  This level is the low of wave ‘B’ of the A-B-C retracement for wave 2.  It MUST be taken out if wave 3 down is to get started and break below the 21 August low of 215.73.  Then IF this happens, the Dow will be below its 50-day moving average, and the next target will be the 200. 

The reason I’m only talking about the Dow this weekend is because this is where the action is.  What happens next week will tell us a lot about what the markets will be doing for the next 3-4 years.  Focus on the Dow!  Then trade it according to your lifestyle.  

Have a great weekend,

That’s what I’m doing,

h

Market Signals for

08-28-2017

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