Professor’s Comments August 28, 2015
Posted by OMS at August 28th, 2015
The Dow rose 369 points, closing at 16,655. Volume was higher than normal, coming in at 115 percent of its 10-day average. There were 5 new highs and 27 new lows.
Yesterday’s rally caused the A-D oscillator to close at a neutral 7.64, so now the final leg of Major Wave 1 down could start at any time now.
The most important thing that happened with yesterday’s rally was that it changed my target for Major Wave 1 down. I had previously estimated that wave 5 would decline to 14,600. However because yesterday’s rally reached 16,666, exceeding my retracement target of 16,300+ by 300 points, I have to re-adjust and place the new target for Major Wave 1 down at just under 15,000.
Other than that, I really didn’t see anything new that would change the overall pattern for the next few months. It still appears that once Major Wave 1 down completes, Major Wave 2 up should retrace back to the 16,500 level during September before the market starts another impulsive decline, probably sometime in early October.
One thing I should note about the above wave counts and targets, is that they should only be used as a general guide. They are no guarantees with them and they are definitely NOT locked in stone. They can and most likely will morph during the weeks ahead.
For example, a few days ago I talked about how the final rally leg of the triangle pattern was missing. In most triangles, the final leg is usually a simple a-b-c pattern. This is what I used to project my retracement target of 16,300+. But as things turned out, the final leg of the triangle morphed into a 3-3 5 pattern, which differs from a simple a-b-c retracement in that the final leg, wave ‘c’ has 5 waves instead of the normal 3. In other words, there was one extra rally wave in the pattern which caused the Dow to tack on those additional 300+ points.
It happens. It really doesn’t change the overall pattern that much, but this is what happens when the market is in a panic mode. Remember, a lot of traders established short positions as the market was declining last week, much more than what occurs in a ‘normal’ market. And when these traders see a strong rally developing, like what happened during the past two days, they buy back their shorts which adds even more fuel to the rally. This is exactly what happened yesterday. There was a lot of short covering.
During the rally I added to my inverse index ETF positions near yesterday’s close and also bought a few more Put Options. I bought a few shares of TWM, the inverse index ETF for the Russell 2K about a half hour before the close when the Money Flow and Trend indicators on the 10 min bars turned positive. However, as soon as I bought the shares, the Chaiken turned negative again, but the Aroon stayed in the Trend Mode, so I continued to hold the shares into the close.
With the Dow now at levels where the pattern suggests the wave 4 retracement is complete, and a 1,000+ point decline ahead, I’m not too concerned about the market running away from me. Also, the past few days of rally has caused a very nice ‘Blade’ to form on the 2,000+ point ‘Stick’ that started on 18 August. So now let’s see if the basic Hockey Stick continuation pattern that is the foundation of The Professor’s Methodology takes over and drops the market under 15,000.
To be clear, I should mention that if you run the numbers and calculate the ‘theoretical’ target yourself, the actual ‘Stick’ from the 18 August high to the 24 August low is 2,198 points. So if you subtract 2,198 from yesterday’s high of 16,667, you get a target of 14,469. This is the ‘theoretical’ target predicted by the Hockey Stick pattern. So you might wonder why I’m using a few hundred points above this now? Hmmm?
Well it has to do with panic. Just like how the BLS uses a fudge factor to estimate the number of new jobs created each month, I use a fudge factor in times of panic. And even though the Dow moved higher yesterday, a lot of those extra points were caused by panic driven short covering. They pushed the market to what I believe is an artificially high number. So we need to take this into account on the next wave down, especially if you are holding a bunch of Put options.
If the Dow starts to move toward 15,000 on this final wave down, it’s EXTREMELY likely that the ‘theoretical’ target of 14,469 will NOT be reached. The combination of bargain hunters and bottom fishers will be out there lurking as wave 5 nears completion, and any rally below 15,000 will likely spark a new round of short covering. So we can’t get too comfortable with our short positions once the Dow gets closer to 15,000. As 15,000 nears, the odds start to shift heavily in favor of Major Wave 2 developing in September, so be forewarned.
Remember, If I’m right about the Bear Market starting, what has happened during the past few weeks is only the preliminaries. The main bout should take place in October, once Major Wave 2 up completes.
So today, I will be watching the indexes on the 10s to see if the indicators turn negative. If they do, I’m just gonna ride my horses down.
That’s what I’m doing,
h
Market Signals for 08-28-2015 |
|
---|---|
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEU |
SUM IND | NEG |
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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Category: Professor's Comments