Professor’s Comments January 12, 2016

Posted by OMS  at January 12th, 2016

After an initial pop at the open, the Dow fell 114 points intraday and then rallied into the close to finish up 52 points at 16,399.   Volume was heavy, coming in at 128 percent of its 10-day moving average.  There were 11 new highs and 606 new lows. That’s a lot of new lows!

In Sunday’s comments, I talked about a scenario where the Dow would likely fall to the 16,200 level before turning around and rallying back to the 16,500.. That scenario appears to be happening now as minor wave 3 of 3 down appeared to complete yesterday at the 16,232 level. I also said that IF the Dow rallies back to the 16,500 level, I would look to get short from the higher levels. This is what I’m looking for now.

Yesterday the A-D oscillator closed with an oversold reading of -223.7.  This reading was only 14.0 points from the previous days reading of -209.7 which although outside of the 10 point range I normally use for a small change is still something that could produce a Big move within the next 1-2 days.  And because of the EXTREME oversold conditions, I would expect the Big Move to be up as minor wave 4 up unfolds.

Yesterday the VIX closed back below its upper Bollinger Band generating a VIX Buy Signal. So with the A-D oscillator showing oversold conditions AND a VIX Buy Signal on the Board, the odds favor some type of short-term rally during the next few days.

Since the current decline started I have been scalping and trading stocks to the downside. But now that the 16, 200 level has been tested and held, I will be looking for stocks to scalp trade to the long side during the next 1-2 days.

The two stocks I am looking at are Hershey Foods (HSY) and Caterpillar (CAT).  Both stocks are EXTREMELY oversold and are showing positive divergence on the Money Flow indicators.  So IF the Chaikin and Fast Stochastic on the 10 min bars turn positive, I’m buyer.  This will be a short-term scalp trade based on a Dow rallying back to the 16,500+ level. I do not plan to hold any of these positions overnight.

Then IF the Money Flow indicators on the Dow start weaken with the index near 16,500, I will exit my long trades and look to establish short positions for a move back below 16,000. Any short or inverse positions establish with the Dow near or over 16,500 will be held for a move below 16,000 as wave 5 down unfolds. Wave 5 down wave could re-test the 24 August low of 15,370.

That’s what I’m doing,

h

BTW, one of my algorithms showed 33 stocks from the Members Watch List as being EXTREMELY oversold. I usually don’t see this algorithm highlight more than 6-8 stocks, so the rally could easily exceed 16,500 and last about a week. For example on 13 November, the algorithm highlighted 26 stocks as being EXTREMELY oversold, The rally that followed lasted 5 days and was good for 669 points.

The highest number of stocks highlighted by this algorithm as oversold was 42. This occurred on 24 August when the Dow reached its low of 15,370. The rally off this low lasted three days and was good for 1,285 Dow points.

In other words, be careful. Remember, it’s likely that the next rally wave will be a wave 4, and we all know how unpredictable these waves can be.

Market Signals for

01-12-2016

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The Creation of Waves and Trends
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