Professor’s Comments January 29, 2016

Posted by OMS  at January 29th, 2016

The Dow rose 125 points, closing at 16,070.  Volume was moderate, coming in at 95 percent of its 10-day average.  There were 31 new highs and 110 new lows.

Yesterday’s trading action produced a series of up-down-up waves that formed a well-defined triangle on the 10 minute bars of most stocks.  See attached chart of the Dow (DIA).

Triangles are consolidation patterns. When they form in an impulse wave, prices usually leave the triangle in the same direction they enter the pattern.

Wednesday’s impulsive decline appeared to be wave 1 down of minor 5 down.  On the surface, yesterday’s consolidation triangle appeared to be a normal wave 2 retracement.  If this is the case, then prices should start to fall immediately.

But triangles usually don’t form within a wave 2.  These waves are usually simple a-b-c structures.  So it’s possible that minor wave 4 was NOT completed on Wednesday, and that the Dow will require one more rally leg before it completes.  Looking at the chart, it’s possible that this rally could approach the 16,400+ level.

If you recall, the 16,400+ level was my original target for the wave 4 retracement.  However, I lowered it by 200 points because the Dow declined to 15,450 on minor wave 3 down.   But IF yesterday’s low was not wave 2 within minor wave 5 down, then it is likely wave ‘b’ within a more complex wave 4 structure.  In other words, wave ‘c’ up could complete closer to my original target of 16,400+.

When I talked about wave 4 several days ago, I said that it was following my projected path almost exactly.  I also said that this had me concerned because wave 4s usually NEVER do this.

The Principle of Alternation says that if wave ‘a’ is simple, then wave ‘c’ should be complex. And as wave ‘a’ unfolded, it was about as simple as it could get.  Too simple.  That’s why I was concerned.

So even though yesterday’s trading looked like a simple consolidation triangle for wave ‘2’ up, when one recognizes that triangles usually don’t form in wave 2s and the Principle of Alternation is considered, it’s highly likely that yesterday’s triangle was part of a much larger and complex pattern for wave 4 up.

I hate trading wave 4 retracements.  The only thing I like about them is that once they complete, prices usually make a nice steady decline during wave 5 down.

So today with mixed indicators on the cockpit and a negative Dean’s List, I’ll be looking to re-establish short positions from higher levels.

That’s what I’m doing,

h

Market Signals for

01-29-2016

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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