Professor’s Comments 3/27/2020

Posted by OMS  at March 27th, 2020

By moving above the 22,200 level yesterday, the odds have increased that the Dow could move slightly higher over the short-term before moving significantly lower. How much higher or lower is the question of the day.

Here’s a few things we know:

1. Yesterday’s rally was accomplished on light volume, the lowest volume in three weeks.  Light volume rallies are generally a short-term negative, especially when they coincide with a strong rally.

2. We also know that the decline since the market turned negative on 12 February was a five-wave decline.  Five wave declines usually tell us the direction of the major trend.  In this case, it’s down.

3. Even though the market has rallied hard for the past three days, the VIX remains extremely high, above 60.  This means the option writers on the CBOE (the pros) still believe the market will be heading down after the rally completes.

4. So far, the current rally has retraced 38 percent of the Wave 1 decline.

So, if we take what we know about the market into consideration, it appears that once the current rally completes, the market should be heading down.

What we don’t know, at least so far, is the labeling of the current retracement wave.  This is more of a theoretical discussion than anything else, but it will shed some light on how much higher and lower the market will go.  Initially, I had thought the current rally was a typical wave 4 retracement, within Wave 1 down.  If it was a Wave 4, the odds for it moving above the 23,890 level were extremely low.  Wave 4s hardly ever move above a 50 percent retracement.  This is the reason I had my target between 23,500 and 24,500.  However, both the shape and the degree of the rally during the past three days tells me it’s probably not a Wave 4.  Now I’m starting to believe it’s a Wave ‘B’ or a Wave 2.  Both waves have the potential to retrace anywhere between 38 to 50 percent of Major Wave 1 or Major Wave ‘A’ down.  Nothing about the current rally has given me cause to change my view that these are retracement rallies and not the start of a new Bull Market.  But after looking at yesterday’s rally, I’m starting think the rally is Major Wave 2 up and not a ‘B’ wave.

The reason I want to talk about this today is because IF it’s a Major Wave 2 up, it means the next decline could easily see the Dow fall below the 18,000 level as it would be a Major Wave 3 down. Previously, when I thought the current rally was a Wave 4, it didn’t think the Dow would fall much lower than 17,000 to 18,000. Now I need to think otherwise. Wave 3s are usually greater than Wave 1. Most times they are 1.5 X Wave 1. In other words we could be getting ready to drop significantly lower once Wave 2 up completes…if its a Wave 2.

As I mentioned above, Wave 2s usually retrace either 38 or 50 percent of Wave 1 down.  So, the two levels we need to watch for a potential reversal are 22,527 (38 percent) and 23,890 (50 percent).  Yesterday the Dow reached a high of 22,595, slightly above the 38 percent retracement level.  So, it’s possible that Wave 2 up could have ended yesterday.  But I only give this scenario about 50-50 odds.  There is still a significant chance the Dow could fall today and then continue to advance. IF after a small pullback, the Dow continues to rally above yesterday’s high, the next level to watch is 23,890, which is the 50 percent retracement level.

There is no guarantee that the Dow will accomplish this rally to 23,890.  As you know, Wave 2s have a mind of their own.  And because they tend to have multiple retracement waves, trading them is EXTREMELY difficult.  The thing you need to remember is that the Dow has already reached a major (38 percent) retracement level.  So, IF the Dow begins to fall during the next day or so, you might want to pay attention to the indicators on the 60 minute bars.  If they turn negative, it will likely mean that Major Wave 3 down is starting.  An impulsive move below the 20,360 level would also tend to confirm the new wave count.

BTW, getting back to yesterday’s low volume rally.  It’s generally a negative indication for later next week, especially after Monday.  We’ll need to watch how the market trades today and into Monday as an a-b-c move into early next week would be very negative for the market.  Protect yourself.  We could be setting up to go significantly lower.

h

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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