Professor’s Comments January 14, 2016

The Dow fell 365 points, closing at 16,161.  Volume was heavy, coming in at 124 percent of its 10-day moving average.  There were 13 new highs and 765 new lows.

Yesterday’s decline appeared to be the first wave of minor wave 5 down of 3 down.  If this is the case, the Dow should make a small rally today before the next impulse wave drops the Dow near the 16,000 level.  Because 16,000 is the level where the Ending Diagonal Pattern began, it should offer strong support.  I would expect the Dow to rally off this level, probably to 16,450+ before it resumes its decline to re-test the 24 August lows. 

So if the Dow starts out higher today, I will be doing two things:  First I will continue to look for shorting opportunities for a move to the 16,000 level.  Remember, the Dow is now in an impulse wave down which should see it re-test the August lows later his month.  But the decline will not be straight down.  It’s starting to look like minor wave 3 of 5 down will complete near the 16,000 level. 

So IF positive divergences start to appear on the Money Flow indicators with the Dow near 16,000, I will exit these short positions and look for the Dow to trade back to 16,400+ level before re-establishing those shorts for a move down to the August lows.

This is how an aggressive trader approaches the market.  Once wave 3 down completes, I will start looking to trade the wave 4 retracement.  Less aggressive traders might want to take a few bucks off the table if the Dow approaches 16,000, and then look to re-establish those positions from a higher level.  Longer term traders might want to hold their inverse positions and wait out the wave 4 rally.

Several weeks ago I talked about the decline, I said that students should learn to manage their money during the decline, especially when the market approaches important support levels.  All I’m doing today is reminding you that 16,000 is a natural support level where I would expect some type of rally to occur.  I don’t expect much of a rally, maybe 450 points, but you never know.

The market is EXTREMELY oversold now. Last night, the A-D oscillator had a reading of -282.1.  Usually the market has a small rally off EXTREME readings like this.  I would expect this to be a small sub wave rally before the market resumes its decline.

One of the things I noticed last night was that several energy stocks were highlighted by my oversold algorithm, so the second thing I be doing today is looking to scalp trade one or two of these stocks to the long side.  The stocks include Atwood Oceanics (ATW), Haliburton (HAL), Nabors (NBR), and Schlumberger (SLB).  These stocks are from the same algorithm that predicted Tuesday’s 118 point rally in the Dow.  

I’ll be using my scalping indicators on the 10 min bars to trigger the trades.  I’m NOT going to be aggressive with these positions, just trading enough to get paid….. if the opportunity presents itself.  If the Money Flow indicators start to weaken, I’ll forget about the energy positions and look to trade inverse index ETFs.  Any energy position that I establish today will be a scalp trade only.  With the market in the heart of a wave 3 decline, I don’t want to be holding any long positions overnight.

BTW, the only reason I’m even thinking about doing these energy scalps is because of the algorithm.  I spent a lot of time developing this algorithm and I really want to see how it performs.  If it can highlight stocks that bounce in the heart of an impulsive decline, it might prove very useful in the future.

Anyhow…

I received two emails yesterday asking about gold.  After I talked about my longer term view of the equity markets yesterday, Rebecca asked if I could share my thought on gold as the Bear market unfolds. 

From a pattern perspective, gold still appears to be completing wave ‘e’ down of a Declining Wedge Pattern for Major Wave 4.  To be honest, I would have thought that this major corrective wave would have been completed by now.  But it hasn’t and this is why I haven’t been talking about mining stocks recently.

However last week, the Money Flow indicators on most of the gold stocks I follow started showing Bullish divergences.  So gold could be very close to a major bottom.  If I’m right about this, gold should start to move higher in the weeks ahead.  The initial rise will likely be slow at first, but once the Fed starts another QE program to stimulate an economy that has been wrecked by a declining equity market, gold should start to move significantly higher.  If the next rally wave is Major Wave 5 up, it could last for many years. 

That’s what I’m doing,

h

BTW, I’ll be heading back to Jacksonville early tomorrow. So I will update the Lists about 7:30 pm and then post a few Comments later this evening.

Market Signals for

01-14-2016