Weekend Strategy Review January 25, 2015

Posted by OMS  at January 25th, 2015

The Dow finished another volatile week by closing down 141 points at 17,673.  This happened the day after it rose 260 points.  The SPX was down 11 points on Friday, closing at 2052.  The OTC market was actually up 7 points on Friday, closing at 4,756.  Talk about volatility and mixed markets!  Wow!

Looking back, 12 of the last 16 trading days have seen moves close to or greater than 100 Dow points. Ten of those moves have been greater than 130 points. Not too long ago, we had to wait for a small change in the A-D oscillator before we got a Big Move in the market.  Now Big Moves are a regular occurrence.

Also, how can one market be down 141 points on the same day that another is up 7?

It’s almost like the market can’t make up its mind. What’s going on?  

This is actually a good question for the folks on CNBC to contemplate.  They would have a great time speculating about the answer.  But the truth is that this is exactly what happens when a market is approaching an important top.  Markets become nervous.

In technical terms, ‘nervous’ means that without a trend in place, the market reacts to oscillators that tell it when its overbought or oversold.  We saw that happen on Friday when the 2-period RSI Wilder was overbought after Thursday’s rally.  Friday’s 141 point drop relieved those overbought conditions.  

When there is NO Trend in place, you MUST pay attention to the oscillators.  This is why I spend a lot of time in my Basic Class talking about trending markets and consolidation periods.  You have to trade them differently. 

In trending markets, I use indicators that follow the market, like the MACD.  In non-trending markets I shift to oscillators, like an RSI or Stochastic.

The key to determine which set of indicators to use is the CCI.   And right now, this indicator is telling me there is No Trend in place. 

Taking this one step further, IF No Trend is in place, then what is the likely pattern?  We know it can’t be anything related to a Trend.  In other words, it’s likely that what we’re dealing with some type of consolidation pattern.  OK, so what are the consolidation patterns?

From my Basic Class, we know there are three basic kinds of consolidation patterns: triangles, wedges, or pullback blades.  That’s it.  

If you look at chart of the Dow and assume the mid-October low was the end of Major Wave 4 down, then I also have to assume that the current rally is part of Major Wave 5 of a large Ending Diagonal Pattern. 

If this is the case, then I must also assume that the current rally is part of Major Wave 5 up and it will also likely form an Ending Diagonal Pattern.  Ending Diagonals or wedges are made up of five large waves.  These waves form because as the top approaches, traders can’t make up their minds about the direction of the market.  This is what has been causing all the extreme volatility we’ve been seeing the past few weeks. 

Here’s the thing:  Anytime I see large up-down-up moves without a Trend in place, I have to think triangle or Ending Diagonal.  And because Ending Diagonals are termination patterns, I have to believe a market top is approaching.

On Friday I posted a chart of the volume indicators.  They look terrible.  A rally without volume is also a sign of a fast approaching top.  Last week, I talked about two possible scenarios.  The first says that the top is already in (on 26 December).  The second says that we still need to have one more rally leg (wave ‘e’) before a top is in.  From a larger perspective, it doesn’t really matter which scenario is occurring.

IF we’re in the ‘e’ wave of the Ending Diagonal for Major Wave 5, then it’s likely that the 18,000 level on the Dow will be exceeded in the near future.  My actual target is closer to 18, 200-18,300.  If we don’t get there and start to break below 17,000, we’re headed a lot lower.

But I don’t want you to get too excited about any of these numbers now.  What I really want you to understand and focus on is the fact that all the large up-down moves we’ve seen during the past three weeks are the characteristic signature of an Ending Diagonal Pattern.  Ending Diagonals are termination patterns.  This is what you should be focusing on your longer term BIG Picture Strategy.

For the shorter term, IF you try to trade a triangle or wedge patterns using typical buy and hold tactics, please understand that all the large up-down moves will likely beat you to death.  So when you trade consolidation patterns, pay attention to the oscillators.  This is why I’m mostly on the sidelines now.  Without a trend in place, I only like to buy things when they are EXTREMELY oversold.  And waiting for this to happen requires patience.

On the other hand, I also want you to understand that we have a special situation in place now that you need to pay attention to given current market conditions.  Right now, both The Tide and Dean’s List are positive.  As long as these indicators remain positive, I will be looking to trade a few trending stocks.  Stocks like HAL, with Green indicators after a TLB Pattern.  It also has narrow bands and a CCI showing Trend Mode.   In other words, I’m limiting my trading now to special situations.  I don’t want to hold junk. There MUST be a very good reason now for me to buy or hold something.

On the other hand, IF my indicators and Lists start to turn negative, I will exit all of my long positions and look to protect myself.  That’s because the next time my Lists turn negative, it’s EXTREMELY likely that they will signal the start of the next Bear Market (if it hasn’t already started on 26 December).  This is when I will be looking to buy a few inverse index ETFs from the Dean’s List.

Have a great weekend.

That’s what I’m doing,

h

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