Professor’s Comments May 18, 2016

Posted by OMS  at May 18th, 2016

The Dow fell 181 points, closing at 17,750.  Volume was moderate, coming in at 98 percent of its 10-day average.  There were 105 new highs and 30 new lows.

Yesterday’s decline reached my short-term target for the Head & Shoulders sub-pattern within the overall Rounding Top pattern on the Dow. Prices actually broke through the 17,500 level getting as low as 17,470.  However late day buying caused the index to finish above its critical support level.

So now that the short-tern target has been reached, the market is once again oversold with no trend in place.  However this time it’s only slightly oversold, and my VTI trend indicator currently has a reading of 40.21 which is getting closer to the Trend Mode number of 30. In other words, the Dow could see a smaller bounce today, but the next retest of the 17,500 level could put it into the Trend Mode.  If the Dow starts to trend, my next target is below the 17,000 level.

Same for the NASDAQ.  The VTI on this index continues to flirt with the Trend Mode, as yesterday’s reading was 31.45.  The ‘Blade’ of a small Hockey Stick pattern continues to form on the NDX (wave 2), and now a break of the 4300 level should send this index reeling.  Yesterday’s low touched the 4311 level before closing at 4322.  A break of the 6 May low of 4,282 would confirm that wave 3 of Major Wave 3 down is underway.  This impulse wave could easily re-test the 8 February low of 3,880 with even lower prices likely.  Be EXTREMELY careful with your technology stocks now.  Both the pattern and the indicators suggest significantly lower prices ahead.

Here’s the thing.  I do not expect the initial decline to 17,000 to be crash like.   That should come later after 17,000 is reached.  The decline to 17,000 will likely be a slow, choppy decline because it is being controlled by numerous sub-patterns within the overall Rounding Top Pattern.  Yesterday’s decline to 17,500 was the result of a small Head & Shoulders sub-pattern.  A larger H&S suggests 17,000 once 17,500 is broken.  And once these sub-patterns complete near 17,000, the larger pattern will begin to take over.  This is when prices should start to fall hard.

As an exercise, you might want to look at a few stocks to see what I mean by all of this. For example, yesterday’s 10 minute bars on the DIA clearly showed that a small H&S sub-pattern was forming.  Initially, the pattern took the form of a small Hockey Stick, but once prices broke below the 12:50 low of 176.25, it was easy to predict the ensuing decline.  Small Hockey Stick and H&S patterns and sub-patterns were everywhere yesterday.  And now with The Tide and Dean’s List being negative, it’s time to take advantage of these patterns and sub-patterns as the market starts to break down.

Remember, we’re still not in the Trend Mode yet.  So don’t get complacent.  If you have a profit as a result of a small pattern, take it.  Don’t be greedy!  I’m still treating the positions I establish as trades.  If the market starts to break below 17,500, I’ll hold a few of these positions for a possible decline to 17,000. But I really want to see a trend start before I fall in love with my shorts.

That’s what I’m doing,

h

Market Signals for

05-18-2016

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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