Professor’s Comments 6/12/2020

Posted by OMS  at June 12th, 2020

Stocks plunged yesterday in their fourth worst point decline in history.  The decline was impulsive…a straight down decline right from the get-go.  There was nothing corrective about it, meaning that it was likely part or all of Wave 1 down of Major Wave C down.  Once all five waves of Major Wave C down complete, the Dow should be trading below the 18,000 level, possibly significantly lower.

Yesterday was a great day to be a Scalp Trader, shorting both the indexes and gold.  In yesterday’s Comments I mentioned that the 2-period RSI on gold was overbought without a trend in place.  Gold was ripe for a pullback.  As soon as the market opened, I started buying DXD and DUST, a leveraged inverse ETF for gold.  It opened at 28.95 and closed 2.71 points higher at 31.48.  And just like with DXD, all you had to do was buy the stock when the indicators gave say so and ride the new momentum indicator into the close.  Easy!

OK, so now that we know the next major down leg has started, what now? Hmmm?  Well, for starters, I’m going to start looking for entry points for inverse index ETFs that I can start holding for the ride down.  After yesterday’s 1,862 point decline, the Dow should begin a Wave 2 rally, correcting a good part of the Wave 1 decline.  This rally should have multiple waves, but the basic structure should be an a-b-c corrective move.  

My target for Wave 2 up is near the 26,300 level, but it could be anywhere between 26,000 and 26,500.  Since last Monday’s top of 27,580, the Dow has lost 2,497 points.  Half of that is 1,249.  If we add 1,249 to yesterday’s low of 25,083, we get 26,331.  For now, this will be my initial target for Wave 2 up. But I’ll likely start laying on short and inverse positions at levels near or above 26,000.  At 26,000 there is probably a 500-800 point upside risk vs. an 8,000 to 12,000 point reward.  I like those odds.

BTW, during yesterday’s decline I couldn’t help but think about all those small investors who were buying calls like crazy only days before.  Hmmm?  I think I mentioned that investor optimism that drives P/C ratios toward 0.5 usually don’t work out.  Like I said, the warning generated by that much call buying can be early, but it’s almost never wrong.  

Anyhow, we should start a Wave 2 rally today.  Don’t even think about buying into the rally (unless you plan to scalp trade, which is OK).  Start looking for shorting opportunities.  If gold rallies today, I’ll begin to look to get short again. Remember, my target for the HUI remains near the 220 -240 level.  Yesterday the HUI closed at 264.42, so if we get a pop during the next few days, there’s still a lot of downside juice to be squeezed from that lemon.

Also, keep in mind that we’re now in a Major Wave C decline.  However, during that decline, there will be many significant rally waves.  The next move up could be one of them.  A lot of traders will be getting short, and their short covering will add fuel to the rally.  So, expect and understand the rallies for what they are…Bear market rallies.  For the next few years, all rallies MUST be viewed as Bear Market rallies.  That’s what yesterday’s decline told us.  Keep your head.  Know where you are and as they say in the fight business, protect yourself at all times.  After the Wave 2 rally, we’re going a lot lower.

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If you have any questions about the video or the follow on training session, send me an email. Don’t be someone who watches or wonders why things happen. Make things happen! Instead of watching TV while you’re cooped up up this weekend, get the video and learn. You’ll feel a lot better about yourself.

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

The Hockey Stick Pattern
The Creation of Waves and Trends
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