Professor’s Comments January 21, 2016

Posted by OMS  at January 21st, 2016

The Dow fell 565 points before staging a late afternoon rally to close down 249 points at 15,767.  Volume was heavy, coming in at 128 percent of its 10-day average.  There were only 3 new highs and an incredible 1,395 new lows.

Yesterday’s intraday decline to 15,451 appeared to be the completion of minor wave 3 down of a five wave declining sequence for Major Wave 1 down.  My target for minor wave 3 down was below the 15,800 level.  However, because yesterday’s decline exceeded this target by 350 points, it now means that minor wave 4 up will probably not reach the 16,400-16,600 level I originally projected for the retracement rally.  My new target for minor wave 4 up is now closer to 16,250.  This also means that once this rally is complete and minor wave 5 down begins, it too will likely go a lot lower.

I originally thought that minor wave 5 down would test the August lows near 15,370, probably completing near 15,000.  However, after yesterday’s decline it is now likely that minor wave 5 down will complete well below the 15,000 level.  This target cannot be accurately predicted at this point, as it depends on where minor wave 4 up completes.

The market is EXTREMELY oversold now.  Last night’s A-D oscillator reading was -281.  So it’s screaming rally.  And with the two Money Flow indicators on the cockpit turning positive, it’s highly likely that minor wave 4 up started late yesterday afternoon.

So what to do now?  Hmmm?

Because yesterday started off so negative, I stayed on the sidelines waiting until I saw positive divergence in the Money Flow indicators before I started to trade. When the Dow was down over 500 points, these indicators on the 10 min bars were the first sign that a bottom had arrived.  Once I saw this divergence, it was a relatively simple matter of picking a few stocks to trade. 

I had Hershey (HSY) on the radar and it was one of the first stocks that started to show divergence and move higher.  It turned out to be a wonderful scalp trade once its Blade was complete.  You might want to take a quick look at the ‘Blade’ that I was waiting to form when I highlighted it yesterday.

And because it appeared that panic was occurring in the oil patch, I decided to scalp a few energy stocks.  When I saw major divergences in Kinder Morgan (KMI) and Halliburton (HAL), I jumped in and rode them up for nice gains.  I did the same thing with Caterpillar (CAT).  I was out of all these trades by the close.

The reason I’m talking about these stocks now is because I will likely be doing the same thing today. So depending on how the market opens today, I will still be looking for those same divergences in the Money Flow indicators.  This is the key to scalp trading.  You MUST see positive divergence in Money Flow on the stocks you want to trade.

So if we assume that wave 4 up has started, let’s think about let’s think about how it will likely unfold.  For starters we know that IF it’s a wave 4, it’s gonna be choppy.  It will likely have at least five minor waves and several sub-waves in it before it completes near the 16,250 level.  It might not get this high.  So we’re likely dealing with a very choppy wave that has about 480 points in it.  I’m laying this out for you because I want you to understand that trading this wave is going to be very difficult.  This is why I have switched to my scalp trading tactics while minor wave 4 up is underway.

If you don’t want to scalp trade during the next week or so, you might want to stay on the sidelines and wait for the market to move above 16,000+ before re-entering any short positions.  But IF you stay on the sidelines, I want you to watch as the various waves of the retracement start to unfold and think about how you would have been whip-sawed if you stayed in. 

Remember, there are both easy times to trade and times when trading is difficult.  We just finished an impulse wave down, which is one of the easiest times to trade.  Now trading will likely become difficult for the next week or so.  So you decide how you want to play it.  If you don’t like difficult, stay on the sidelines and wait for higher prices.

On the other hand, if you want to learn and practice your trading skills, the next week or should be ideal for scalp trading.  It could provide you with some valuable trading experience.

Just remember to look for divergences, follow the indictors, trade smaller quantities, take profits quickly, and get out by the end of the day.  

That’s what I’m doing,

h

Market Signals for

01-21-2016

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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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.