Professor’s Comments October 23, 2015

Posted by OMS  at October 23rd, 2015

Things got pretty crazy yesterday after European Central Bank President Mario Draghi said the bank will leave interest rates unchanged and reassess whether to extend its massive bond-buying program by the end of the year.  He left the door open for even more monetary stimulus in December.  Draghi’s announcement sent the euro sharply lower, and caused world stock markets and gold to rally.

The Dow started off strong led by McDonald’s and continued to rise throughout the day, closing up more than 300 points. However, even though the Dow and SPX were making new rally highs, the rise in the Russell 2K was pretty tame.

So once again, we had a day where the Generals led the market higher, but the troops continue to lag.

To illustrate this, I’m attaching a daily chart of the Russell 2K (RUT). The index topped in late June at just under 1,300, and appears to have completed a five wave down trend in late September. I have labeled the 29 September bottom of this down trend as Wave 1 down.

Then as the large cap stocks rallied to new highs into October, the Russell 2K lagged and did not even come close to reaching its June high. And even after yesterday’s strong rally in the Dow, the RUT still closed lower than last week’s high of 1,170 at 1,154.52.

If you look at an hourly chart of the RUT since its 29 September low (the start of the current rally), it appears to be a normal a-b-c retracement, which characterizes it as a wave 2. As a matter of fact, an argument can be made that the RUT topped last Tuesday, and that everything since has been part of wave 3 down. Note that the Arron indicator is still showing a down trend on the hourly chart.

So what’s going on? Well clearly there is an inter-market divergence.  Large cap stocks are very strong with small caps not so much.

The Dean has been telling us this for weeks by ranking the large cap positive index ETFs high on the Dean’s List while the small cap Russell ETF has been on and off the List.  As a matter of fact, just recently the Dean put TWM, the inverse index ETF for the Russell 2K back on the List.  And even after yesterday’s big rally in the Dow, TWM remains on the Dean’s List with a POSITIVE Money Flow indicator.  So the Dean is still telling us that he sees a mixed market with large cap stocks remaining strong, and small cap stocks being less so.

Same for the Tide and the Money Flow indicators. Both of these indicators measure large cap or major technology stocks.  Both continue to remain positive.

The fly in the ointment is the pattern. The Dow and SPX appear to be forming Bearish Rising Wedge Patterns for their Major Wave 2s. And as we know from Class, Wave 2’s often have a mind of their own. They can retrace all or a substantial portion of Wave 1 like we have seen in the Dow, NASDAQ, and S&P 500, or they can have a smaller retracement as has occurred in the Russell 2K.  But large or small, until last summer’s highs are exceeded, the retracement must still be labeled as a Major Wave 2 in a Major Bear Market.

So where are we? The Wave 2 Rising Wedge Patterns in the Dow and SPX appear to be nearing completion. All of the required sub-waves are in place. The larger cap indexes have retraced about 75 percent of Wave 1 down. Retracement levels between 62 and 75 percent often mark a level where major reversals take place. The markets remain overbought. However all of the cockpit indicators, including the breadth and Money Flow indicators, remain positive. So until the indicators and Lists turn negative, prices can continue to push higher.

Gold: Shares of GDX rose 0.27 cents to 16.12. It still appears that GDX is forming a small wave 4 Blade that should provide enough energy to support a ‘Rope Jump’ above the 17 level.

That’s what I’m doing,

h

Market Signals for

10-23-2015

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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