Professor’s Comments September 25, 2013

Posted by OMS  at September 25th, 2013

The Dow fell another 66 points, closing at 15,336.  Volume was moderate, coming in at 99 percent of its 10 day average.  There were 145 new highs and only 27 new lows.

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. 

The Big Move could be a rally wave for ‘b’ of 2 down.  If this is the case, it sets up a situation where wave ‘c’ of 2 down could be a bit deeper then expected.  Yesterday, the SPX got as low as 1694.9.  I had originally expected wave 2 of 3 Up to end near the 1690 level.  But right now I’m not seeing the signs of life that I would normally expect to see at a ‘bottom’, so IF we fall today and get close to 1690, it will be interesting to see how the algorithms react.

As we know from Class, wave 2s are very unpredictable in both retracement length and time. They usually do what they want to do, and all I usually do is wait them out.  I don’t expect that this wave 2 retracement will be much lower than the 1690 level, mostly because it still appears to be a wave 2 of a wave 3 up.  However if it starts to fall below 1690 it could develop into something more complex, so we’ll have to watch it.

One possibility for the current wave structure that I have not mentioned until now is that the Dow and other indexes could be forming an Ending Diagonal Pattern since 22 May.  If this is the case, then instead of the current down wave being a wave 2 of 3 up, it is likely a wave D down of a five wave sequence in the Ending Diagonal.  Does it really matter?  Probably not, other than IF we’re really in wave D down, then the indexes will likely fall several points lower, before rallying hard in the final E wave up.

It also means that instead of having three additional waves to trade (waves 3 up, 4 down and 5 up) before the Major rally completes, we’ll likely see only one more rally (wave E up) before we have to start being concerned with the downside.  I would expect that even if the current structure is an Ending Diagonal, the Dow would still exceed 16,300 by a healthy margin.  The SPX in this scenario would also project to the 1750-1760 level.

Right now, as long as the SPX stays above 1690, I still have to go with the wave 2 of 3 scenario.  However If we start to break below 1690, I’ll have to look at the Wave D scenario more closely.

One of the things that is having an impact on the current wave structure and pattern is the political situation in Washington.  The ongoing fight over the continuing resolution, and whether to fund or delay Obamacare is forming another cloud over the markets.  If the government is shut down during this fight over Obamacare, it will likely cause the current pattern to morph into the wave D scenario.  Otherwise, by this time next week, some type of agreement on the CR should be in place and the ‘cloud’ over the market should disappear. 

Just remember that even under the best possible outcome in the current scenario, all passage of the CR does is allow the government to continue running until mid -December.  The real fight is going to be over the debt ceiling which is expected to be reached in mid-October.

Currently 61 percent of Republicans polled by the Washington Post oppose raising the debt limit, and House Speaker Boehner said he expects a “whale of a fight” over that must-pass measure.

Bottom line:  We’re in a period where the markets should be ready to rally hard, but the political situation is keeping them from doing so.  We saw these temporary ‘clouds’ develop last December when we had to deal with the ‘Fiscal Cliff’ issue and then again in May when the markets were concerned about the cuts mandated by the sequester.  So we’re back in another one of those cloudy periods.  Don’t expect much from the markets until these ‘clouds’ pass and we start to see sunshine.

Waiting and watching,

That’s what I’m doing,

h

BTW yesterday, the 50 moved to within two points of the 200 on AAPL.  IF the stock can hold current levels near 490 for the next 2-3 days, there is a good chance that AAPL will swing into an Uptrend.  Now that’s something that could bring a whole lot of sunshine to this market, especially to NASDAQ technology.  Its initial sales of nine million iPhones times several hundred dollars each projects a lot of revenue for the company going forward.  However, the PT indicators are still Red, because of a negative MACD.  And I’m still not seeing a lot of volume accumulation by the institutions, so be careful.  AAPL may still need one more leg lower to complete what appears to be a wave 2.  I’m watching with patience.

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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