Professor’s Comments February 26, 2016

Posted by OMS  at February 26th, 2016

The Dow rose 212 points, closing at 16,697.   Volume was moderate, coming in at 94 percent of its 10-day average.  There were 90 new highs and 40 new lows.

Yesterday’s rally appeared to be part of impulse wave 3 within wave ‘c’ up of Major Wave 2 up.  This wave should continue for another 200+ points or so before minor waves 4 down and 5 up complete the pattern near the 17,000 level.

Yesterday’s rally on the Dow reached the 16,698 level, just 3 points shy of my lower target of 16,700 and 300 points from the upper target.   In other words, we need to be careful now.

When the current rally started, the reward-risk odds were over 8:1.  Now the odds have reversed.  Now with only about 300 points of potential upside reward remaining in the pattern and lots of downside risk, students need to reassess the reward-risk odds and start thinking about how they plan to manage their money in view of those new odds.

Here’s the thing:  Because yesterday’s rally was impulsive, it was likely wave 3 of a 5 wave Ending Diagonal pattern.  Once this current rally wave completes, probably near 16,900, wave 4 down and 5 up should follow.  So the last 300 points of this rally to 17,000 will likely be a very choppy ride.  Students need to start asking themselves if hanging around for the final move to the top will be worth it.

Could the Dow push beyond the 17,000 level? Sure. The final wave of an Ending Diagonal pattern sometimes has an ‘overthrow’ wave which could take the Dow another 100-200 points above 17,000.. But don’t count on it. The odds for an overthrow wave happening are only about 30-50 percent. These odds are about the same for a truncation of the pattern, meaning that the Dow doesn’t have to reach 17,000.

If the pattern truncates, the Dow could trade up to 16,850-16,900, then pull back to 16,700 in wave 4 before wave 5 up begins. If some unusual event occurs in the world during this wave 4 pullback, it would preclude the Dow from completing the final leg of its pattern. How likely is this? Just think about some of the things that are going on in the world now. You decide.

Right now, most of the cockpit indicators with the exception of the DMIs, are very positive.  I would expect them to stay that way for at least another few days as we move into March.  But keep your eye on the Coaches.  If they start to show signs of weakening, it will tell me that the money is beginning to leave the market.  I will not be holding long positions in most equities if the money flow indicators turn negative.

BTW, now is the time for money managers to start talking with their clients about the new reward-risk ratio. Your clients will be thanking you in a few months from now.

That’s what I’m doing,

h

Market Signals for

02-26-2016

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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