Professor’s Comments May 17, 2016

Posted by OMS  at May 17th, 2016

The Dow rose 175 points, closing at 17,711.  Volume was moderate, coming in at 90 percent of its 10-day average.  There were 198 new highs and 38 new lows.

The explanation for yesterday’s rally is pretty simple.  Anytime you have oversold conditions without a trend in place, the market usually rallies to relieve the oversold conditions.  This is something that short-tern traders need to watch for with their ‘trial’ positions.  Otherwise hard earned profits on these ‘trail’ positions will evaporate as the market chops around to complete its pattern.

Yesterday’s rally did not change the overall Rounding Top pattern.  All it did was further develop the right shoulder of the Head & Shoulders sub-pattern within the Rounding Top.  The neckline of the H&S remains at the 17,500 level and once this level is broken to the downside, prices should start to fall below 17,000.  With weakening Money Flow indicators, this break could happen within the next 1-2 weeks.

Yesterday’s rally did produce a few changes to my key indicators.  The Tide changed back to neutral as the HI-Lo indicator, one of the four breadth indicators in The Tide, turned positive.  For trading purposes, as long as The Tide stays neutral to negative, I will continue to look for short positions.  However, I will not be buying any new long positions unless The Tide turns back to positive.

Also, the Dean’s List turned positive, so right now there are no inverse index ETFs on the List to buy. 

Last week I talked about the Rounding Top pattern and how it often results in choppy trading. Rounding Tops take time to develop. This is why we need to be patient and wait for a trend to develop before becoming aggressive with our short positions.  A break of 17,500 on the Dow will likely start the downtrend.

Most gold stocks rose yesterday, however it’s still not clear if the basic metal has started its next uptrend.  Gold (the metal) could still be developing a 3-3-5 zig-zag pattern for wave 2. If this is the case, the metal could still drop below 1200, possibly to 1170-1180 before wave 2 completes.  This would put pressure on most gold stocks, many of which have started uptrends.  As long as gold stays above 1250, the odds suggest that wave 3 up is starting.

BTW, while I use several Trend indicators to check for trends, most of these are custom indicators not available to my students.  However, the CCI is available on most charting programs and can be used to verify trends.  I use a setting of 35-periods. That way when the CCI moves above the 100 level, I consider the stock to be in an uptrend. A move below -100 suggests a downtrend.  A value between 100 and -100 indicates no trend.

For example, right now the 35-period CCI on GDX is 113.33, which would indicate an uptrend.  If you look at a chart of GDX, you can see that the ETF entered the trend mode on 7 April at 20.78.  The ETF closed at 25.25 yesterday.  Compare this with the CCI on GLD which has been below the 100 level for the past week.

So gold stocks appear to be in the trend mode, but gold (the metal) is not.  This and the fact that UUP, the ETF for the U.S. Dollar, is on the Dean’s List, should be a Red Flag for gold traders.   If wave 3 up in gold is starting, I would like to see the Dollar start to fall with UDN, the inverse U.S. Dollar ETF, on the Dean’s List.  Otherwise, there is a chance that corrective wave 2 in gold is not complete.

That’s what I’m doing,

h

Market Signals for

05-17-2016

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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