Professor’s Comments January 13, 2016
Posted by OMS at January 13th, 2016
The Dow rallied for 118 points, closing at 16,516. It reached a high of 16,591. Volume was heavy, coming in at 127 percent of its 10-day moving average. There were 16 new highs and 579 new lows.
In my comments this weekend, I talked about a scenario where the Dow would fall to the 16,200 level and then rally back to 16,500 before resuming its decline to retest the 24 August lows.
On Monday the Dow fell to a low of 16,232 before it rallied back above 16,500 yesterday. So it appears the scenario I talked about this weekend is right on track.
It appears that yesterday’s rally was part of a small wave 4 corrective pattern within Wave 1 down. If this is correct, then once wave 4 completes, the Dow should resume its decline.
After yesterday’s trading, I can’t be sure what type of pattern this small wave 4 is tracing out. It could either be a triangle or a some type of complex a-b-c pattern. The difference is that if it’s a triangle, the Dow should fall to the 16,350 level either today or tomorrow, then bounce to about 16,500 before the next significant down leg begins. .
If the pattern is an a-b-c correction, the Dow should rally to about 16,650 today or tomorrow before the next significant down leg starts.
Either way, I’ll start looking to get short as once the pattern completes as the next wave down should re-test the 24 August lows.
One of the reasons I was able to predict Monday’s decline and Tuesday’s rally was because of the pattern. Patterns enable me to make projections on likely short term targets. So once a target is reached, I can either take some money off the table or establish new positions.
Remember, now that the Dean’s List and The Tide are negative, I’m looking for patterns and developing scenarios based on what Lists and breadth indicators are saying.
OK, now that the Dow has broken below 17,100 and it appears that my short-term scenario is playing out, it might be a good time to think about how this scenario could impact the longer term patterns of the market.
As you know I tend to talk about the day to day movement of the markets in my Daily Comments. Like yesterday when I talked about how minor wave 4 up would take the Dow back up to the 16,500+ level before resuming its downtrend to test the 24 August lows.
This is how a trader looks at the market. Traders try to take advantage of every turn. For us, every potential move of 50 points is an opportunity for profit.
But what about those students who don’t want to trade every turn? What should they be thinking about now? Hmmm? Here’s what I would thinking about……
When the Dow broke through the 17,100 level, it told me that the next Major leg of the Bear Market has started. It confirmed that the Bull Market that started in March 2009 completed on 19 May at the 18,351 level. It means that the down wave that followed into the 24 August low was Major Wave 1 down of the new Bear Market. And the subsequent rally into the 3 November high of 17,978 was Major Wave 2 up.
And because the final wave of the Major Wave 2 rally was an Ending Diagonal Pattern, the break of 17,100 projects an initial move to the 16,000 level, and then ultimately a re-test of the 24 August low of 15,370.
But that’s not what I want you to be thinking about now. What I want you to understand is that from a bigger picture perspective, IF the market breaks the 16,000 level now, it’s highly likely that the downside slide is not over. From a pattern perspective, it’s means that the decline is only beginning! That’s because If the Dow moves below 15,350 now, I have to label it as Wave 1 of Major Wave 3 down. There will need to be four more Major Waves within major Mave 3 down before the Bear Market completes. It will probably take years.
If the Dow does re-test the 24 August low, it will take $Billions out of the stock market which will impact the U.S. economy. It will likely cause the economy to enter a Major Recession, maybe even a Depression! This isn’t obvious to most people right now, but IF the current wave continues to decline, which I believe is a strong possibility, I have to view it as the first wave of a major five wave sequence.
So instead of looking at the market on a shorter term basis and trying to scalp a few points as the market makes its daily moves, today I want you to take some time and think about what the above would mean to you on a longer term basis. Think about what would happen if the Dow declined to 10,000 or 8,000 or retested the 2009 lows near 6,000? What would this do to your current portfolio the way it’s structured now? How would this impact your business or your job?
Remember, the reason I study patterns or develop scenarios based on patterns is because they can and do happen. Sometimes these patterns morph into other patterns. But when they start to follow theoretical paths, we need to pay attention. A few weeks ago, when the Dow was consolidating in the Wedge Pattern, I warned that both scenarios I had on the Board were termination patterns. One would take the Dow above 18,350, the other (the Ending Diagonal) would terminate under 17,979. As things turned out, the Ending Diagonal won It was all based on patterns.
So if the Dow rallies today, I’ll look to get short above 16,600. If the Dow falls, I’ll wait for the next rally within the triangle (near 16,500) to get short. Again, I’m a trader. But for those of you take a longer term view of the market, you should be thinking about how you want to position and protect yourself IF the current wave down is Wave 1 of Major Wave 3 down. If this wave completes near the 15,000 level, it will mean that the Dow has declined over 3,300 points and the Major impulse wave, where most of the Bear’s real damage will be done, has not even started yet.
It’s something to think about.
That’s what I’m doing,
h
Market Signals for
01-13-2016
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
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