Professor’s Comments January 5, 2016

Posted by OMS  at January 5th, 2016

The Dow fell 276 points, closing at 17,148.  Volume was heavy, coming in at 134 percent of its 10-day average.  There were 51 new highs and 142 new lows.

News of a slowing Chinese economy caused the overnight Dow futures to open almost 300 points lower. They had been up over 50 points before the news. The opening decline continued throughout the day with the Dow reaching a low of 16,958 before a late rally recaptured about half of the losses.  By breaking through lower trend line support near 17,100 on the Dow, the price movement was enough to turn The Tide negative and generate a Sell signal.

The market appears to be breaking out of its two-month consolidation pattern to the downside. Consolidation patterns after a rally usually lead to higher prices. However in this case, the rally leg that preceded the consolidation was part of a Major Wave 2 retracement of the past summer’s decline. So it appears that the consolidation was the truncation of wave 5 within the Major Wave 2 rally which is now starting to break down.

If the above analysis is correct, it means that Major Wave 3 down of a Major Bear Market is starting.

Yesterday’s decline caused The Tide and the Dean’s List to turn negative.  However, the early decline and late rally caused both Coaches, my Money Flow indicators, to turn positive. When this happens, it usually means that the market will pause for a few days to consolidate before resuming its decline.

Last night, the Professor algorithm had 70 shorts, so he is confirming the start of a significant decline. However, because only 1 of my 3 trend indicators have entered the Trend Mode, it’s likely that the heart of the decline has not started yet.

So if the market rallies during the next few days, I will use the opportunity to establish a few short positions. 

As long as the Tide and the Dean’s List remain negative, I will start looking to Buy inverse index ETFs from the Dean’s List.  I will also start looking for opportunities to establish short positions in stocks highlighted by Emeritus for the Honor Roll.

Last night, Emeritus only highlighted two stocks as shorts.  And because Emeritus is a Trend Algorithm, the short list tells me that the major down trend is still a few days from starting.  Usually when a major down trend starts, Emeritus will highlight several stocks as shorts.  So by only highlighting two stocks, he’s confirming what the other two Turned indicators are saying.

Bottom Line:  Now that the 17,100 level on the Dow has been broken to the downside, I have to protect myself against the possibility of a significant Bear Market decline.  It appears that the Ending Diagonal Scenario that I have been talking about for months is taking over as the dominant scenario.  This scenario projects an initial target below the 16,000 level with even lower prices likely.  If a trend starts to develop, the Dow will likely retest and break the 24 August low of 15,370 on the next wave down.

Protect yourself.

That’s what I’m doing,

h

Market Signals for

01-05-2016

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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