Professor’s Comments December 17, 2015

Posted by OMS  at December 17th, 2015

The Dow rose 224 points, closing at 17,749.  Volume was moderate, coming in at 109 percent of its 10-day average.  There were 42 new highs and 125 new lows.

The Fed announced that it was raising short-term interest rates 0.25 percent.  It was the first rate hike in 9 years.  The market liked what it heard and rallied breaking through the 17,700 level I mentioned yesterday. So it now appears the Dow will make another run at 18, 350+, probably in the next 3-4 weeks.

By breaking above 17,700, it means that wave ‘c’ up likely started on 14 December, and waves 1 and 2 have been completed. Yesterday’s strong impulsive rally was likely part of wave 3 of ‘c’ up.  Impulsive waves usually continue for several days.

So because the Dow appears to be in an impulsive rally wave, I would expect wave 3 up to complete near the 18,150 level, +/- 50 points, then pull back to under 18,000 for wave 4, before making its final wave 5 run to re-test the 18,350 level.  If the pattern is perfect, it should exceed 18,350 by 100-150 points.

The move higher should be very similar to the pattern I talked about last week, just before the Dow broke through the 17,200 level, which forced me to change my primary Scenario.  I really hated to do this because it meant that the original pattern for wave ‘c’ up had truncated.  But it was truncating at a time when the market is usually very Bullish.  However, with a negative Dean’s List and a negative Tide, I had no choice.    

So even though it now appears that the market is heading higher, please remember that most patterns are never perfect.  Patterns based on wave counts can easily morph into other patterns, and because it appears that we’re dealing with the final wave of a Major pattern, the current pattern can easily truncate. The Dow does not have to trade back to the 18,350 level.

Yesterday’s rally was supported by the Dean’s List, as 3 of the 4 positive index ETFs re-appeared on the List.  The lone holdout is the Russell 2 K, as TWM is still on the List.  This is not surprising, as the small cap stocks on the Russell 2K will be the most affected by yesterday’s hike in interest rates.  Most of these smaller companies depend on borrowing for expansion a lot more than their big brothers on the S&P500.  So any rate increase tends to impact them more.  The 0.25 percent increase isn’t much, but when you add it to all of the other burdens of running a business, including healthcare and regulations, it’s just another thing they have to deal with.  

Anyhow, because it now appears the market is heading higher, I will start trading a few of the positive index ETFs from the Dean’s List.  I’m still not going to go hog wild in my approach, because I still anticipate a lot of volatility in the final run to the top. 

Also, 2 of the 4 breadth indicators that make up The Tide are still negative.  And even IF they turn positive in the days ahead, the technical damage that has been done to the breadth indicators is significant.  This tells me that any rally from current levels will be accompanied by major divergences in breadth.  This is never a sign of a healthy rally.  It’s usually terminal!  Just remember a few days ago when we were seeing new lows consistently outpacing the new highs by ratios over 10:1, with some days reaching 368 and 630 new lows.  This kind of technical damage will not be easily undone by any rally.

BTW, even during yesterday’s rally, the number of new lows was 3 times greater than the number of new highs. This is not a good sign going forward.

So given the risk in trading this final leg up, I will mostly be looking to scalp trade for the next few weeks, similar to what I’ve been doing since this market entered its Bullish Wedge pattern last month. I plan to keep my positions small and take profits when I can.  However now that the market appears to be in an impulsive wave 3 up, I will also look to buy a position trade in DDM on a pullback.  IF I enter this trade, I will hold it overnight for a move to 18,000+.

That’s what I’m doing,

h

Market Signals for

12-17-2015

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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