Professor’s Comments May 18, 2017
Posted by OMS at May 18th, 2017
The Dow fell 373 points yesterday, closing at 20,607. Volume was high, coming in at 116 percent of its 10-day average. There were 47 new highs and 87 new lows.
We learned a lot about the future of the equity markets yesterday. And we could learn even more in the days ahead.
That’s because yesterday’s down draft identified the move as wave ‘c’ down within a developing triangle pattern for the Dow and SPX. The Russell 2K also showed its hand by breaking below 1,380. The impulsive decline down to 1,356 identified the move as part of wave 3 down within Major Wave 1 down. The next key move for the RUT should be a ‘Rope Jump’ of the 200, currently located at the 1,321 level. If this happens, it would mean that the RUT topped last month at the 1,426 level and is starting a Major Bear Market decline. This would be a very bad omen for the Dow, SPX and NASDAQ as their patterns play out during the next few months.
Yesterday the Dow got as low as 20,601. For the past few weeks, I have been saying that wave ‘c’ down could trade down to the 20,500 level. A lot of people thought I was nuts for saying this, but that’s what the pattern suggested. It wasn’t me, it was the pattern. That’s what technical analysis is all about: patterns and indicators. So, on Tuesday, when the indicators started turn negative, the pattern took over. The result was a decline of 373 points on the Dow. It wasn’t the news, or President Trumps problems with FBI Director Comey. Or the fact that all of this will likely delay his plans for healthcare and tax reform. No, it was simply the pattern.
The pattern suggested the Dow and SPX were in a triangle. Triangles are consolidation zones. The market enters these zones in times of uncertainty, or when it needs to rest. So, as traders, we try to identify the tops and bottoms of these consolidation zones, fading or selling the tops and buying the bottoms. On Tuesday, when the Dow was pushing the top of the zone near 21,000, I was buying inverse index ETFs like DXD, SDS, SDOW and TWM. Yesterday they all paid off handsomely.
There is also something else we know about the waves within a triangle. They DO NOT go straight down. Each wave within a triangle usually forms a mini-a-b-c pattern. So, seeing the Dow come within 100 points of my target, and knowing that a sub-wave ‘b retracement was likely, I took profits. If the market bounces today, I’ll look to re-establish those inverse positions at slightly higher levels. But I won’t be as aggressive this time.
That’s because the odds have changed. It’s one thing to short the Dow when it’s at 21,000 and has a target near 20,500. But now that is near 20,600, there’s not that much juice in the lemon. So, unless the Dow rebounds a 100-200 points, I’m not that interested in the short side anymore. If I do decide to trade it from higher levels, I certainly won’t be doing it with large positions.
BTW, now that the Dow is near the lower level of the trading zone, a student might ask why they shouldn’t be getting long now? Hmmm? After all, IF the Dow is near the lower range of its trading zone, and the price usually leaves a triangle in the direction it leaves the pattern, it would seem like now might be a good time to buy a few positive index ETFs for a ride higher into the fall? Wouldn’t this be a good idea? Well, maybe.
The ‘maybe’ has to do with the shape wave ‘c’ down takes within the triangle. The highest probability scenario is that wave ‘c’ down will end near the 20,500 level in a simple a-b-c move down. But there is an outside chance that the move could be a Zig-Zag or a 3-3-5 flat pattern. If this happens, the Dow could easily break 20,500 and fall to the 20,100 level. This would NOT negate the triangle pattern. Everything would still be on track for the triangle to complete in mid-June and a rally into the fall.
Right now, I don’t see this Zig-Zag happening, but it could. That’s why I’m not all that anxious to trade here. I want to see what happens during the next few days. .
Anyhow, like I’ve been saying, triangles are tough to trade. The markets are definitely NOT in a Trend, so trade cautiously. Remember to keep your positions small, and take profits quickly.
Gold is another matter. For the past few days, I have been talking about how gold appeared to be completing sub-wave 2 within Wave 3 up. I mentioned how the 50 was above the 200 and the next step was for the price to move above the moving averages so sub-wave 3 of 3 Up can start. This happened yesterday. GLD finished the day up 2.14 points, closing at 119.79. So now GLD is above the moving averages AND in an UpTrend. My target for GLD is the 134+ level.
Just remember that even with GLD in a Wave 3 up, there will be pullbacks. But now these pullbacks should be temporary. After yesterday’s trading, the 2-period RSI on GLD was a very overbought 99.31. I don’t buy anything this overbought! Even if I believe it’s going significantly higher. I just don’t. I have my Basic Position in gold, which I’m holding, and now, the only time I will consider adding to this position is on pull backs. This is why I’ll be watching the 2-period RSI for Rifle Trades. Again, as long as GLD remains in an UpTrend, I’ll be looking for opportunities to Buy and Trade additional shares whenever gold becomes oversold or overbought.
BTW, IF you didn’t establish a Basic Position in gold, one way of doing this is to use the first pullback as your entry point. I do this a lot when I miss the first move of a turn. I never worry about missing the train. I know I can always buy a ticket to ride at the next stop (when the 2-period RSI becomes oversold).
Yesterday’s Sector Report continued to weaken. The report now shows only 4 strong sectors and 20 weak. If you have been paying attention to this report, you probably noticed how the report has changed in the past few weeks. When the market was rising, it was not unusual to see 18-20 strong sectors. But in the last week, the number of strong sectors has fallen from 20 to 4. If I’m right about the triangle, one the pattern completes, the Sectors should give you a good indication of where to be when the market starts its next rally.
There were no changes to the top sectors. The Leisure, Computers, Semis, and Healthcare sectors continue to lead with Real Estate, Autos, Telecoms, Media, and Specialty Banks lagging.
That’s what I’m doing,
h
Market Signals for
05-18-2017
DMI (DIA) | NEG |
DMI (QQQ) | POS |
COACH (DIA) | NEG |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
SUM IND | NEG |
VTI | NEG |
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