Professor’s Comments March 31, 2017

Posted by OMS  at March 31st, 2017

The Dow rose 69 points, closing at 20,728.   Volume was moderate, coming in at 91 percent of its 10-day average.  There were 93 new highs and only 9 new lows.

Yesterday the Dow reached a high of 20,754 which was likely the completion of a small sub-wave up within Wave ‘C’ up.  If this is the case, the Dow could pullback today before Wave ‘c’ up resumes probably completing near the 20,850 level.

When the Dow was down a few points yesterday, I bought a few shares of DDM, the positive index ETF for the Dow.  I sold these shares for a nice profit near the close.

So, the question I have today is do I want to trade the move to 20,850, or should I wait until the Dow moves another 100-200 points and then look to establish short positions for the move down to the 20,000 level?

The pattern suggests the Dow will move to 20,800+ before falling, and by highlighting 39 longs last night, The Professor algorithm is supporting the pattern.  Today is also the last day of the month, which is usually Bullish.  So, IF the Dow opens down this morning and gives me a nice entry point, I will likely buy a few shares of DDM again, looking a move to the 20,800+ level.  

I’m not really crazy about trading the long side now, given that the intermediate term pattern is pretty negative.  I’d rather be looking to establish short positions in index ETFs, but given that the indicators are pretty positive now, I will likely have to wait a few days.  Retracement waves are like this.  You pretty much know what’s going to happen, but because the outcome of the pattern is never guaranteed, trading them is always difficult.

I mention this today because the question I presented above, whether to trade the final 100-200 points of a move, is something that comes up frequently.  Students see a large move either up or down, which is likely the first move of a larger pattern, and then know an a-b-c retracement wave, either a wave 2 or a “B” wave, is coming.  The probably made a few bucks on the larger move and are anxious to trade the retracement.  They place a few counter-trend trades and find themselves being whip-sawed by the up-down-up action of the retracement.  Hmmm?  Sound familiar?

Here’s the thing:  You don’t have to trade the retracement waves.  It’s OK.  Sometimes it’s better to wait them out by being on the sidelines.  In this case, after the pattern suggested a move down to the 20,400 level, we were expecting a retracement to 20,800 to 20,900.  At the time, I thought the decline was Wave 1 of a larger move down.  But after dissecting the wave down, it had too many small retracements within it to be the start of a major move down.  It was NOT impulsive, so it had to be something else.  The odds shifted that the move down was Wave ‘A’ of Major Wave ‘D’ down within a large Ending Diagonal Pattern.  This was a Major change.

It meant two things:  If the decline was part of Major Wave ‘D’ down, the Ending Diagonal Pattern was not complete.  There had to be a Major Wave ‘E’ up after Major Wave ‘D’ down completed.  Major Wave ‘E’ up would likely take the markets to new highs.

The second thing it meant was that the decline to 20,400 was only wave ‘A’ of the correction.  Waves ‘B’ up and ‘C’ down of Major Wave ‘D’ down needed to follow.

From Class, we know that retracement waves, like the current wave ‘B’ up, consist of a-b-c type moves.  We know they are difficult to trade.  That’s because there is NO Trend in place when the market is retracing.  Also, this is when the indicators are giving mixed signals.  So, you must rely on the pattern.  And as we know, patterns can morph, so the Dow doesn’t have to retrace to the 20,800+ level.

This is why I’m being very cautious now.

One of the reasons I took profits yesterday near the 20,750 level on the Dow, is because I looked at the odds.  And even though I felt the Dow would move to the 20,800+ level to complete wave ‘B’ up, I had to weigh a potential gain of 50 -100 points up against a potential decline of 900-1,000 points.   And to get the potential gain, I had to hold the position overnight.  I didn’t like the odds.

Like I say over an over…you don’t always have to be in the market.  Just when the odds are high.

So, IF the market does rally today, I’m still not sure if I will be trading the long side.  I believe the better odds are with inverse index ETFs established near or above  the 20,800+ level.  I will start looking to short the Dow above 20,800 by watching the indicators on the short-term bars.  This may not happen today, as the end of month positive bias will likely keep the market well bid until early next week.

Yesterday’s Sector Report was little changed.  The report is still very strong with 19 strong sectors and only 5 weak.  The Semiconductors, Banks, Leisure, and Transports continue to lead, with Energy, Service, and Housing lagging. 

I’m ignoring gold for now.  Gold and mining stocks fell yesterday in a move that appears to be wave ‘c’ down of corrective wave 2 down within Major Wave 3 up.  I noticed that UUP replaced UDN on the Dean’s List last night.  So, with UUP on the List, it tells me that the Dollar is starting its final rally to the 104-105 level.  Once this rally completes, the Dollar should start a major decline.  The Dollar could get cut in half during the next 2-3 years. This is when I expect gold will shine, but for the short term, a rising Dollar will put gold under pressure.

That’s what I’m doing.

h

Market Signals for

03-31-2017

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