Weekend Strategy Review More Thoughts 8/23/15

Posted by OMS  at August 23rd, 2015

I had a chance to take a closer look at the charts this morning, and to tell the truth, I really don’t like what I see.

There was a lot of panic selling late Friday, and IF the Fed doesn’t step in today with some type of stimulus program, the selling will likely continue on Monday. The Dow could see another 200+ point decline before it starts to stabilize.

IF this deeper decline occurs, it would change the pattern somewhat, in that the next rally leg or wave 4 of 3 up might only retrace back to the 16,650-16,700 before wave 5 of 3 down starts to develop. And IF this happens, it means the Major Wave 1 down could complete below its target o 15,855. Panic is never a good thing for chart patterns. It tends to exaggerate the moves. And in this case, the downside targets could be exceeded by several hundred points.

So the question for today is really about how to trade panic. Hmmm?

It’s tough, because at this point, we don’t know what the Fed will be doing.

Right now, I’m out of all of my inverse ETF positions. So no matter what the market does on Monday, it doesn’t really matter to me.

If the Fed acts to stimulate, I’m not gonna get hurt by the ensuing rally. And if they sit pat and do nothing, I’m just going to watch to see where the panic selling ends. If it ends near 16,300, I’m NOT going to do anything until I see 16,650 or higher on the Dow. Then I’ll look to re-establish my inverse positions.

The reason I’ll be looking to do this is because of the exaggerated move down to 16,300. It would mean that the odds of a move back to 17,000 for wave 4 have diminished, and the odds for another 1,000 point drop from 16,650 have increased significantly.

When I sold my inverse positions on Friday, it was because at the time, the odds favored a significant bounce. But now, because there are signs of panic in the markets, we could see additional selling that would lower the price targets for the next two waves of the Major Wave 1 down pattern..

Bottom Line: IF you did not sell your inverse index ETFs late Friday, you might want to watch how the market opens on Monday. If the Dow drops another 200 points or so, you will have to decide on whether you to take profits at those lower levels or ride out the wave 4 bounce so you can take advantage of even lower prices.

On the other hand, IF the Fed does act, you’re probably looking at a 500-600 rally from current levels before wave 5 down starts to bring the Dow back down. If the Dow bounces back to 17,000+, my target for wave 5 down will remain just under 16,000.

I hope you are enjoying the weekend.

That’s what I’m doing,

h

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