Professor’s Comments March 10, 2016

Posted by OMS  at March 10th, 2016

The Dow rose 36 points, closing at 17,000.  Volume was low, coming in at 87 percent of its 10-day average.  There were 94 new highs and 6 new lows.

Not much changed with yesterday’s trading.  It appears that yesterday’s choppy sideways action was part of a small wave 4 triangle within the Ending Diagonal for wave ‘C’ of Major Wave 2 up. Triangles are consolidation patterns, so the market should rally once the small triangle completes.

This final rally should be a ‘through over’ wave 5 completing near the 17,150-17,200 level.  But please be aware that the Dow does NOT have to do this.  It could truncate and start lower at any time. The odds for a final ‘through over’ wave are now about 60-40.

Yesterday’s intraday rally high reached 17,048, which is right at the 200-day moving average.  Several weeks ago, I talked about how the Dow would likely trade back to its 200-day moving average and used it as a target.  Now that has happened. 

So once the Dow completes the final wave of the Ending Diagonal, Major Wave 3 down should begin. I expect this to happen within the next week or so.

This is NOT the time to be buying stocks. It’s time to be managing money.  With the Dow now at the 17,000 level, the reward-risk ratio no longer favors the upside.

Remember, the target for the current Ending Diagonal Pattern is where it began.  In this case, the pattern started at the 15,503 level.  So if I assume that Major wave 2 up completes near 17,200, that’s a possible 200 points of upside reward that needs to be weighed against a possible 1,500 points of downside risk.  In other words, the current reward-risk ratio is about 1: 7.5 negative.

However I also have to factor in the possibility that the next wave down will likely be Major Wave 3 down within a Major Bear Market.  So the odds of it trading below 15,000 on the next leg down are high.  If I use 15,000 as a target, then the reward- risk ratio becomes about 1:10 negative. 

Those are terrible odds to be trading the long side.

That’s why I’m currently on the sidelines watching for the final waves of the Ending Diagonal Pattern to complete.

BTW, I received several questions about gold during the past few days.  Here’s my take:  It appears that gold is very close to completing its wave 1 up.  Gold (the metal) is currently trading at 1258.  I expect the current wave to complete just under the 1300 level before pulling back to under 1200 as it develops its wave 2 blade.  So I’m not in any hurry to buy gold now.  I’m just being patient. 

That’s what I’m doing.

h

Market Signals for

03-10-2016

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The Hockey Stick Pattern
The Creation of Waves and Trends
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