Professor’s Comments – Before the Open 11/29/2021

Posted by OMS  at November 29th, 2021

The markets are turning…. but let’s keep a few things in mind. 

The wave counts suggest that even though it appears that we are in wave 3 down, it’s still only wave 3 of Wave 1 down.  If this is true, there will be a lot more downside to come during the next few years.  This new Bear Market is only starting.

If you look at a weekly chart of the Dow ($DJI) you will quickly see that the rally that started off the 21 March low, had seven Red Arrows along the way.  Three of these Red Arrows were false alarms, meaning that they did NOT meet the exit criteria. Two of the arrows did meet the exit criteria, and the Dow fell between 1,000 and 2,000 points before a confirmed Green Arrow appeared to put you back into the market.

So now the Weekly Dow is on another confirmed Red Arrow. Is it real?

Here’s the thing…. The first confirmed Red Arrow appeared after the Dow gained about 10,000 points.  I believe this was the completion of Wave 1 up and the beginning of corrective Wave 2 down.

The second confirmed Red Arrow appeared after a gain of 7,700 Dow points.  This appeared to be the completion of Wave 3 up as it was followed by almost 4 months of sideways correction which was likely Wave 4.  Wave 5 up of the sequence started with the Green Arrow on 11 October and carried the Dow to its top of 36,565.  In other words, the five wave sequence that started back in March 2020 appears complete. Now the Dow is on another confirmed Red Arrow.  And because this Red Arrow comes after five complete waves are in, it’s likely that this arrow is real and is likely marking the first wave down of the new Bear Market. 

This is important to understand, especially when you look at how long it took for final Major Wave 5 up to develop…about 18 months.  So, Friday’s decline, while severe, is only a spit in the bucket when you step back and look at what happened to the Dow since March 2020.  The thing I want you to note on the chart is that the indicators have only just begun to turn negative.  Note how the volume and momentum indicators turned positive in March 2020 and petty much stayed positive, except for the two times the Dow pulled back in Waves 2 and 4. The rest of the time, the indicators were very positive. 

One of the things I want you to notice about the Weekly Chart is how the Dow started to trend on 15 June 2020.  Can you see the yellow bar?  That bar is telling you the Dow is trending. It took over a month for the yellow bar to appear after the Green Arrow was confirmed.  You could have safely added to your position on DDM or UDOW after seeing the yellow bar. 

But now I want you to look at the new Red Arrow.  Do you see any yellow bars associated with it yet?  No!  This is telling us that the Dow is still NOT trending yet and probably won’t for another month (four bars).  In other words, from a longer term perspective, we probably won’t be into the heart of the decline for at least another month or more. 

The reason I wanted to point this out to you today is because I know that many of you had a great day on Friday and are looking to add to your positions.  But now is still NOT the time to be looking for home runs.  After Friday’s 900 point decline, the Dow will likely have a small retracement bounce.  That bounce could be anywhere from 150 to 250 points.  If it occurs, I’ll be watching the shorter term bars to add to my positions in a few inverse index ETFs.  But even if the bounce does occur, I’m still only using about 60 percent of my funds.  I need to see a down trend develop before going all in.

At this point, I don’t know if any bounce is associated with a minor correction within Wave 3 down or is it the start of corrective wave 4 up.  I suspect the former, as I believe Wave 3 down has a lot more to go.

But that’s NOT the point I want to make.  What I’m telling you is that without a trend in place, we’re probably going to see a lot of backing and filling for the next few weeks as Wave 1 down and Wave 2 up complete.  During this time there could be wide swings in the Dow, with 1,000 to 2,000 point moves possible.  Just remember, this is only the beginning.  Also remember that when wave 3 of Wave 1 down bottoms, probably near the 34,000 level or below, there will be some type of retracement wave 2 up before Wave 3 of Wave 3 hits.  So, until that time comes, I remind you to trade cautiously.  Don’t be afraid to take profits when you can.  If the Bear Market is just starting, there will always be another Red Arrow waiting around the corner on the shorter term bars that you can use as an entry point.  

BTW, thanks to all who have taken advantage of my Black Friday – Christmas Consulting Special.  I have had a lot of fun doing it.

h

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

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.