Weekend Strategy Review December 13, 2015

The Dow fell 310 points on Friday, closing at 17,265.  It was down 582 points for the week.  The NASDAQ was down 112 points on Friday and down 209 points for the week.

Once the Dow fell below the 17,400 level, the Bullish Rising Wedge/Five Waves to a Top (FWT) Pattern imploded.  The five waves of the Wedge which would have provided the springboard for higher prices never got a chance to fully develop.  The breakdown in the pattern started to become evident on Thursday when the 200- point intraday rally was not sustained into the close.  And when this happened, the final legs of the Wedge never got a chance to fully develop causing the pattern to morph into something else.

This was not entirely unexpected as the two Scenarios I had on the Board were both termination patterns.  Prices in both patterns had to fight a negative Tide to reach their targets. The Ending Diagonal had a projected top at near 17,978.  As long as the Dow stayed below that level, this pattern remained in play.  However, because it appeared that a Bullish Wedge was forming for wave 4 of the FWT Pattern, I had to give the FWT priority over the Ending Diagonal.  The FWT pattern had a projected top near 18,350. But even though the projected target was near 18,350, I mentioned that this pattern could easily truncate.  And because of this I had been advocating small trial positions and scalp trades only.  When I scalp trade, I am out of the market at the end of the day.

Now you know why.

The break of the 17,400 level has increased the odds that the Dow will now test the 24 August lows below 16,000.  It appears that the Five Waves to a Top Scenario has truncated and the Ending Diagonal Scenario is taking over.

At this point, I have not done the necessary analysis of how the market might fall to lower levels.  I’ll do this after I post these comments and try to get it to you later this weekend.  But for now, we have to assume that the decline to below 16,000 will take place in five waves.  The waves we are seeing now are just the preliminaries. 

The 50-day moving average is still above the 200, so technically the Dow is still in an Uptrend.  Friday’s decline did produce a negative ‘Rope Jump’ on the Dow, so there is a good chance that what we’ve seen this past week is part of wave 1 down.  If this is the case, then there should be a retracement wave 2 up, followed by the impulse wave down.  If we’re only working on wave 1 down, there should be plenty of time to establish short or inverse positions during the wave 2 retracement.

Remember, we have a Fed meeting next week.  And most of the volatility we’ve been seeing the past few weeks is being caused by the possibility of the Fed raising interest rates. 

If the market likes what it hears from Fed Chair Yellen next week, the market could rally to new highs.  It could!  Friday’s move below 17,400 can also be interpreted as the final wave of and a-b-c pattern for wave 4.  Yeah, the Wedge Pattern was blown up, but IF the Dow stays above the 16 November low of 17,210 (it got as low as 17,231 on Friday) there is still an outside chance that the Wedge has morphed into an a-b-c pattern for Wave 4, with a Wave 5 up rally to follow.

On the other hand, if the market panics about rising rates, the Dow will likely start a decline to below 16,000 consistent with the Ending Diagonal Pattern.

So we won’t know a lot until after the Fed meeting.

One thing that’s almost certain; expect more volatility. 

Right now, with a negative Dean’s List and a negative Tide, I’d have to lean toward the Ending Diagonal and lower prices.

There are a few reasons for this.  The first is because when I ran The Professor algorithm last night, he had 51 stocks to the downside.  In other words, he was confirming the down turn.

The second has to do with Emeritus and the Honor Roll.  Last night when I ran my trend algorithm, Emeritus listed five stocks as shorts.  Four of the five highlighted were related to the financial sector. So it appears that Emeritus is also very concerned about a rate hike.  An increase in rates would make the dollar stronger compared to other currencies.  Goods made in America and priced in dollars would tend to become less competitive with those produced in foreign countries.  This would put pressure on American companies that sell a lot of their goods in foreign markets.  An example of this would be Apple, which was one of the stocks that Emeritus highlighted as a short for the Honor Roll.

Same for the financials and utilities.  BTW, of the stocks that Emeritus highlighted as a short last night was ConED (ED), a utility.  But given that I don’t believe in shorting the utilities because you have to pay the high dividend while holding the short, I didn’t put it on the Honor Roll.  Nevertheless, it’s pretty obvious that Emeritus is concerned about what might happen next week.

Bottom Line:  Continue to trade cautiously into next week’s Fed meeting. Even though 17,400 was broken, there is still not a lot of clarity in the patterns.  With a negative Dean’s List and a negative Tide, I have to lean toward lower prices as suggested by the Ending Diagonal.  But because 17,210 has not been broken, there is still an outside chance that the market could rally.  In other words, continue to keep positions small and scalp trade.  But now that the Tide has turned negative, I will favor scalp trades to the downside.

Finally, of the things you should note is that since The Tide turned negative on 3 December at the 17,478 level, the Dow is down 213 points. Also while you’re looking, check out what happened to energy since DUG replaced DIG on the Dean’s List on 12 November.  DUG closed at 63.01 on 12 November. Yesterday it closed just under 74. Hmmm? Watch those ‘Sticks in the Sand’.

Have a great weekend.

That’s what I’m doing,

h

A few more weekend thoughts…

After looking at the charts this morning, I have to assume that Major Wave 2 up completed on 3 November and that everything since has been associated with the start of the next major leg down in the Bear Market that started this past summer.

If the Dow starts to move below its 16 November low of 17,214, it would likely mean that the Ending Diagonal Pattern has taken over and the 24 August lows will be tested.

IF the Ending Diagonal is occurring, it means that the first target for the Dow must be near or under the 16,000 level.  This is where the Ending Diagonal began.  So any analysis based on an Ending Diagonal Pattern MUST start with the 16,000 level at a target. 

The question is how will it get there? 

Well we know that IF Major Wave 3 down is starting, it MUST consist of 5 minor waves.  And because Friday’s decline moved below the 200-day moving average, I have to assume that it was part or all of minor wave 1 down of Major 3 down.

Remember, the Dean’s List, Tide abd both Money Flow indicators on the cockpit are negative. Also, The Professor identified over 50 stocks as shorts on Friday, so he appears to be confirming the start of a major down trend..

So far minor wave 1 down has declined about 670 points from the wave 2 top made in early December.  Wave 3s usually decline about 1.5 times wave 1 as a minimum.  So IF the Dow topped on 3 November at 17,978, the decline to the 16 November low (wave 1 down) was 768 points.  768 X 1.5 = 1152 points.   Then subtracting 1152 from the wave 2 top made in early December near 17,900, the first target for the current wave down (minor wave 3 down) should be close to the 16,748 level. Let’s call it 16,750.

If panic sets in, which I fully expect it will, the decline could go as low as 16,500.  So for now, I’m going to use a target somewhere between 16,500 and 16,750 for minor wave 1 of 3 down.

Then after minor wave 1 down completes, there should be a retracement rally for minor wave 2 up of 3 down. This retracement should approach the wave 1 bottom (near 17,200) followed by a crash wave that will re-test the August lows.

Once all five minor waves of wave 3 down are complete, the Dow should be trading under 15,000.

Now I know that the above is a lot to absorb on a Sunday morning.  But I wanted to map it out for you so you can think about what the Ending Diagonal Scenario means before trading begins on Monday morning.

Is the above Scenario cast in stone? Absolutely not!  Remember, a lot depends on what the Fed will do with interest rates on Wednesday.  All I’m saying now is that IF the market interprets the Fed’s move as being negative, and starts to decline, it’s highly likely that it will move down below 16,000 in a five wave sequence similar to what I have outlined above.

BTW, the move to 16,500 could happen very quickly, in a matter of a few days.  So please be careful as the Fed meeting approaches. 

Have a great rest of the weekend.

That’s what I’m doing.

h

Market Signals for

12-14-2015