Weekend Strategy Review September 25, 2016

Posted by OMS  at September 25th, 2016

The Dow fell 131 points on Friday, closing at 18,261.  It was up 138 points for the week.  The NASDAQ finished down 34 points on Friday and up 61 points for the week.

Friday’s decline wiped out all of Thursday’s 99-point gain and then some.  It also turned several of the cockpit indicators negative or neutral.  However, the decline did not fall below the lower trend line of the ‘Blade’ of the Hockey Stick Pattern that started on 14 September.  So Friday’s decline was inconclusive.

But once again, we saw how an oversold RSI with NO Trend on the VTI was able to predict the decline.  This is something that new students should note when using indicators.  The reason I mention this today is because even though all of the cockpit indicators were positive going into Friday, the market still fell.  Why did this happen?

Well, it happened because most of the indicators on the cockpit are Trend indicators.  They work best when the market is in a Trend.  When the market is in a trading range, like it is now, the short term moves are best predicted with indicators that show overbought or oversold conditions.  Indicators like a stochastic or an RSI.

This is why I added the VTI to the cockpit.  The indicator helps students know when the market is in a trending or non-trending condition.  This is why I was reluctant to trade the upside on Friday, even though all of the cockpit indicators were positive.  It was also why I established a few ‘trial’ positions in DXD and SH when the two indexes reached the pattern targets I predicted for them.

So with an EXTREMELY overbought market on Thursday (2-period RSI of 95.3) and the VTI showing No Trend, the market declined.

BTW, on a slightly larger scale, the Dow continues to remain in a trading range bounded by 18,700 on the upside and 18,000 on the down.  As long as the Dow remains within this larger trading range, it’s likely that the most effective indicator will remain the VTI-RSI combination.  So IF you do any trading in the days ahead, please pay attention to these indicators. 

Students should understand that there are several factors at work now that will likely keep the markets within the overall trading range for the next 6 weeks or so.  With the Fed keeping interest rates unchanged before the election, it almost guarantees that the market will remain range bound until 8 November.  But with all the uncertainty associated with this election, there’s likely going to be a lot of volatility.  We’re starting to see this now. 

Here’s what you should understand about all of this: As the markets make their large daily moves within the large trading range, they are also developing smaller patterns.  And these smaller patterns, like the small Hockey Stick on the Dow that has been developing since 9 September, are the things to watch.

Just prior to the Fed announcement, I talked about how the Dow broke an important trend line from an Ending Diagonal (ED) Pattern on 9 September at the 18,400 level.  I also mentioned that the decline was impulsive.  These two things should NOT be ignored, even though the market rallied hard for the two days after the Fed announcement.  The moves are all part of an overall Bearish pattern.  They are NOT the start of a new Bullish pattern.

Remember on 9 September, when the Dow dropped 394 points and broke the ED trend line of 18,400, it signaled that the final wave of Major Wave ‘C’ up was likely over.  The impulsive decline also signaled that Major Wave 1 down of a Major Five Wave down sequence was likely starting.  We can’t ignore this! 

But we also know that after an impulsive decline that is likely part or all of a Major Wave 1 down, the market usually makes some kind of corrective retracement wave sequence.  Some type of wave 2. And as this corrective wave starts to develop, it’s hard to determine if the corrective wave is minor wave 2 within Major Wave 1 down or something else.  At this point we don’t know, and you shouldn’t be too concerned about it. All we know is that the market is doing its thing within a well-defined trading range.  And until prices break out of this trading range, and start trending, trading will be difficult. 

So be patient.

Any decline below 18,000 now would suggest that the next impulsive wave down (wave 3 of Major Wave 1 down?) is underway.  This should be confirmed by all of the cockpit indicators turning RED.  This is when I will become aggressive to the downside using inverse index ETFs like DXD and SH.  BTW, I closed out my ‘trial’ positions in these ETFs on Friday because the market was no longer overbought.  The VTI was still showing NO Trend conditions and once the RSI normalized, there was no point in holding the positions any longer.  I took the profit and ran.

So this week I will continue to watch the Blade of the small Hockey Stick Pattern develop.  When I ran The Professor after Friday’s trading, he only had 9 longs to go with 11 shorts.  So The Professor is neutral.  This is important because the DMI on the Dow turned negative on Friday, and whenever I get a DMI turn, I run The Professor to see if he confirms the turn.  He did not!  In other words, by not highlighting a lot of shorts (30-40+) he is NOT confirming the start of a new down trend, but rather telling us that the current trading range will likely continue.

So continue to watch the Blade of the small Hockey Stick pattern on the Dow.  If the lower trend line of the ‘Blade’ is broken, look for the Dow to fall to the lower trend line of the trading range, near 18,000.  But even if this happens, I wouldn’t get too excited about anything until 18,000 is broken.  Until then, watch the 2-period RSI to identify short-term trades within the trading range. 

Have a great weekend.

That’s what I’m doing,

h 

Market Signals for

09-26-2016

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