Professor’s Comments January 8, 2016

Posted by OMS  at January 8th, 2016

The Dow fell 392 points, closing at 16,514.  Since the New Year began, the Dow has lost over 900 points. Volume was heavy again, coming in at 132 percent of its 10-day moving average.  There were 27 new highs and a whopping 490 new lows.

It’s becomming pretty clear that an impulsive Wave 3 down is underway.  However the markets are EXTREMELY oversold and near the close appeared to be looking for an excuse to rally.,. That excuse could come at 8:30 tomorrow morning when the BLS releases its December Jobs Report.

I usually don’t like to hold positions ahead of the Jobs Report, and this time is no exception.  After three days of decline, I covered most of my short positions before the close.

One of the reasons I did this is because I started to see a lot of positive divergences in the stocks I was trading .  If you look at the Chaikin Money Flow Indicator on the DIA, you will see what I mean.  I saw similar divergences in most of the stocks I looked at.

Divergences in Money flow are a very important factor in trading.  I probably don’t talk about this enough on these pages, but you need to know that it’s one the first things I look at before deciding on a trade. This is especially true when I’m trading a volatile market, like the one we’ve had during the past few days. 

For example, when I’m looking to trade a stock from the Honor roll on the 10 minute bars, besides watching for the Chalkin to cross below the zero line, I always want to see a divergence between price and Money Flow.  Not sometimes…ALWAYS!

When I’m looking to short the “Blade” of a negative Hockey Stick pattern, I want to see the price make a higher high but the Chaikin not follow the price higher.  This classic negative divergence is the key set-up for a successful trade. 

I’ll try to give you a few examples of this in my WSR this weekend. But right now, I’m more concerned about what the BLS will say in tomorrow’s Jobs Report.

Given all of the positive divergences I saw near the close today, it wouldn’t take much to start a small rally from current oversold levels.  If the Jobs number comes in big, like 280 -300 K Jobs, it could easily check the current decline and spark a rally.  But with companies like Macy’s announcing 45+ store closings and 4,000 job cuts, it’s hard for me to believe we’ll see a number anywhere near 280K tomorrow.  A lot will depend on the size of the ‘fudge factor’ the government uses in its estimate.

Anyhow, no matter what happens tomorrow, I would be very cautious about holding a lot of stock during the next few days.  If the market rallies after the Jobs Report, I would view it as a shorting opportunity.

A lot of technical damage has been done since Monday’s initial decline.  It will take time to repair this damage, so even if the market rallies on the news, I still believe the market is going a lot lower.

Protect yourself.

That’s what I’m doing.

h

Market Signals for

01-08-2016

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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