Weekend Strategy Review December 16, 2018

Posted by OMS  at December 16th, 2018

The markets fell hard on Friday in what appeared to be the start of Wave 3 of Major Wave 3 down.  The decline was impulsive with little or no retracement along the way.  It was exactly the sort of decline one would expect at the beginning of a major down wave.

The Dow finished 497 points lower, closing at 24,101.  It was down 288 points for the week. The NASDAQ was down 160 points on Friday, and down 59 points for the week.  The Dow and NASDAQ remain on long-term Weekly Sell Signals.  My custom Money Flow indicators on the Weekly charts have also turned negative, telling me the institutions are now moving large sums of money out of the equity markets.  Its one of the reasons my timing signal for Bonds is positive.

OK, so now that Wave 3 down is underway, the obvious question is how low can it go before bouncing? Hmmm?  Well, for starters we know that wave 3s do not go straight down.  They drop in five waves.  So, if Wave 1 of Major Wave 3 down (the decline from 25,980 to 23,888) was 2,099 points, Wave 3 theoretically should be about 1.5 times the Wave 1 decline or approximately 3,149 points.  That would put the target for Wave 3 down near the 21,679 level.  Currently the 200-week moving average on the Dow is located near the 21,340 level, so it’s possible that Wave 3 down will complete somewhere between 21,340 and 21,679.  For now, I’m going to split the difference and use 21,500 for my target.  That’s about 2,600 points below Friday’s close. 

As a side comment, I must tell you that this target (21,500) seems like it would be better suited as the target for Major Wave 3 down, not Wave 3 down.  If you recall, I had been using 23,500+ as my target for Wave 3 down, so I’m somewhat bothered by the 2,000 point difference.  But that’s what happened when Major Wave 2 up morphed into a 3-3 5 flat. It dropped the lower target significantly. Ultimately, this will also impact where the Bear Market bottoms in terms of price and time.  It’s starting to look like this Bear is going to be here for a while.  

But like I said at the beginning of this discussion, the decline won’t be straight down.  At some point, a corrective wave 4 up will come, retracing a significant portion of Wave 3’s decline. This could happen as early as next week.

One of the reasons I say this is because the Fed is scheduled to announce its latest policy on interest rates next Wednesday, 19 December.  This announcement is shaping up as a very important meeting.  It has Presidential interest.  As most of you know, Fed Chair Jay Powell has been under extreme pressure for raising interest rates at a time when the Fed is selling assets and the American economy is slowing. So, it will be interesting to see if any changes to interest rate policy are announced. If the market hears something positive in the announcement, it could trigger the start of a small wave 4 up within Wave 3 down.

Also, remember that next week will see both a Fed announcement and options on Friday, so we need to expect more volatile trading.  As I teach in Class, prices going into the Fed announcement are usually lower than after the announcement, so the markets could get a boost from the Fed meeting, especially if the announcement is interpreted as positive.

So, I’m going to be cautious going into the announcement.  Even though my targets suggest significantly lower prices, I’m will be watching the shorter-term bars early in the week looking for signs of strength.  I don’t want to give back any of the profits I made by scalping Wave 3 down.  If the short-term indicators turn positive, I’ll move to the sidelines and wait out the announcement.  Then once the announcement is over, I’ll look for another opportunity to enter my short positions after the announcement.  With this Fed announcement occurring in the same week when options are expiring, it could produce several out-sized moves in the market.  Be EXTREMELY careful with your trading.  If you do decide to trade ahead of the announcement, make sure you shorten up on the time bars and stay on the right side of the indicators. 

The Sector Ratio stayed at 1-23 negative after yesterday’s session.  Household Products were the only positive sector.  It still had an RS ranking of zero.  Students should note how well the Sector Ratio has performed during the past few weeks.  Even without charts or indicators, the Sector Ratio told me everything I needed to know about the markets.  This simple ratio that measures the strength of the sectors without ANY interpretation, has been so right for so long, I wouldn’t trade without it.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

12-17-2018

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.