Weekend Strategy Review December 21, 2014
Posted by OMS at December 21st, 2014
Wow! What a week for stocks.
I’ve been sitting in front of my computer for the past few hours, looking at the charts and trying to figure out what actually occurred last week, and what might happen next. The best I can come up with is similar to what I talked about on Thursday, where either one of two scenarios is occurring.
Either the market topped on Friday and retracement wave 2 up completed, or the Dow is on its way to making new highs. Right now, with mixed indicators, it’s still too early to tell.
The Dean’s List and Tide are positive, but are not all that strong. The PT indicators are still negative, and the P-volume continues to show negative divergence. So the indicators are mixed. Mixed indicators usually occur during retracement waves.
Another reason I still believe the current rally is a wave 2 is because it has been driven mostly by short covering. Back in early December, a lot of traders bet against the market and placed stop orders to protect themselves in the event the market started to rally. Then once these stops started to get hit, it triggered a lot of new buying causing the market rally higher and higher. This is how rallies in Bear Markets develop. They are usually very strong.
If this is what’s happening, the question for this weekend is how long will the rally last? Hmmm? Good question. The thing I always look at when I’m trying to determine if a rally is impulsive or corrective is the wave count. I try to determine if the wave is made up of 5 waves, indicating the primary trend, or is it occurring as a 3 wave corrective sequence? If you look at the 60 minute chart of the Dow, it clearly shows that the decline from the 5 December high of 17,991 was accomplished in 5 waves down. This is why I labeled it as wave 1 down.
So If I assumed that the decline since 5 December was wave 1 down, then the 3-day rise since 17 December is likely corrective wave 2 up. On a daily chart, the rally appears to be straight up. However if you look at the shorter term chart, it’s pretty clear that the early rise on Wednesday and subsequent rally after the Fed announcement has an a-b-c structure. So an argument can be made to label Wednesday’s rally as wave ‘a’ of 2 up. The ‘b’ wave is not so clear, but these retracement waves can occur almost anywhere. It’s even possible that both wave ‘a’ and ‘b’ completed on Wednesday. Then there was Thursday’s amazing straight up rally of 421 Dow points. It was definitely impulsive. This could be a cause for some confusion, but if one looks further, even Thursday’s straight up rally could be corrective. It could be wave ‘c’.
Here’s why: When you look at each of these waves individually, it’s hard to tell what’s happening with them. But taken together, they start to look like a corrective wave sequence. This is because of the Principle of Alternation.
This principle says that IF wave ‘a’ is short and complex, meaning an a-b-c structure, which is what Wednesday’s wave ‘a’ up was, then wave ‘c’ up should be longer and simple. Also, IF wave ‘a’ takes X amount of time to develop, then wave ‘c’ should take twice as long as wave ‘a’ to develop.
If you look at a shorter term chart of the SPX, either 15 or 30 minutes, you can see that wave ‘a’ occurred on Wednesday. Then wave ‘c’ took all of Thursday and Friday. In other words, exactly twice as long as wave ‘a’.
The thing that we know about the Principle of Alternation is that it ONLY occurs in retracement waves. So right now, I have to believe that the current rally is still a wave 2.
If this is the case, wave 3 down should begin immediately. If not, the entire wave 2 Scenario blows up and the Dow will likely trade above the 5 December high of 17,991 likely reaching the 18,200 -18,300 level. If this happens, especially if The Tide stays positive, I’ll have to develop a new wave count.
However before I do that, I want to see what happens on Monday.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for 12-22-2014 |
|
---|---|
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
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Category: Professor's Comments, Weekend Strategy Review