Professor’s Comments May 24, 2016
Posted by OMS at May 24th, 2016
The Dow fell 8 points in a choppy session that closed at 17,493. Volume was low, coming in at 82 percent of its 10-day average. There were 63 new highs and 19 new lows.
Yesterday’s low volume session did not produce any changes to the overall pattern or to the cockpit indicators. It still appears that a Head & Shoulders sub-pattern is developing within an overall Rounding Top Pattern. The Head & Shoulders Pattern has a target near the 17,000 level. A break of 17,485 on the Dow and 70 on CAT would tend to confirm prices are headed toward 17,000 and that wave 3 of 3 down is underway.
Wave 3.2 up could have completed yesterday. If this is the case, prices should start to decline impulsively as wave 3 of 3 down begins.
There was a very small change in the A-D oscillator last night, so we need to be on the lookout for a Big Move within the next 1-2 days.
It’s still a bit early to be thinking about this, but IF prices do start to break below 17,485, we will need to watch the 17,000 level very carefully. That’s because 17,000 is the target for the H&S Pattern. And as we know, stocks tend to move toward targets. But once (IF) 17,000 is reached, there is no other target on the board. In other words, another pattern with another target will have to be developed.
Of course, the Rounding Top Pattern could start to take over after 17,000 is reached and stocks could go into free fall from that level. The trend indicators for all of the major indexes should be in the Trend Mode at that point, and with negative trend indicators, a decline to 15,000 is possible.
But 17,000 also represents a critical support level because it is the interim low between the first two highs of the THT Pattern that formed the left side of the Rounding Top Pattern. So IF prices do not continue to move lower after 17,000 is reached, there is a possibility that a new pattern could start developing from that level.
The Bullish case from 17,000 would be a rally back above the 20 April high of 18,168. This alternative scenario would mean that Major Wave 2 up is NOT complete and the current decline is only wave ‘B’ within Wave 2 up with Wave ‘C’ yet to come. I give this scenario a very low probability at this point, but I thought I would mention it so you know what could happen.
All of above means that we’ll have to watch the indicators very closely if the market starts to decline to the 17,000 level. As long as The Tide stays negative and the Money Flow indicators don’t show positive divergence, I wouldn’t worry too much about this scenario. Not now anyway.
Right now I’m still concerned about a break of 17,485. Last night the VTI, my custom trend indicator, had readings of 31.36 for the DIA and 36.8 for the QQQ. A reading of 30 or below indicates that a Major Trend is starting. In this case, that trend wave would likely be 3.3 down. So both VTI indicators are getting close to entering the Trend Mode.
BTW, the two other Trend Indicators I use (AIQ’s CCI and a 35 period CCI) are split at this point. The 35 period CCI is showing that a down trend has started on the Dow (DIA), but AIQ’s CCI has not confirmed it. So at this point, 2 of the 3 Trend indicators I use are still showing No Trend.
The reason this is important is because as I mentioned to a student yesterday, I like to use leverages index ETFs when the market is in the Trend Mode. Otherwise the slippage that results from choppy trading can cause poor results. For example, if you short a stock like CAT at 70 and it falls to 69 before popping back to 70, you’re even. But if you short the Dow at 17,700 by buying DXD and the Dow falls 200 points before popping back to 17,700, you’re not even. You will lose money because of the slippage that results from the futures and options used to generate the 2:1 leverage of these ETFs.
Leveraged ETFs are NOT perfect trading vehicles. However, they do have their place ONCE THE TREND STARTS.
Anyhow, I’ve rambled enough for this morning. Now let’s see how the day develops. I don’t expect much until we have another re-test of 17,485. That could happen within the next 1-2 days.
That’s what I’m doing,
h
Market Signals for
05-24-2016
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | SM CHG |
DEANs LIST | NEG |
THE TIDE | NEG |
SUM IND | NEG |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments