Weekend Strategy Review December 20, 2015

Posted by OMS  at December 20th, 2015

The Dow fell 367 points on Friday, closing at 17,129.  It was down 136 points for the week.  The NASDAQ was down 79 points on Friday and down 10 points for the week.

It was a very volatile week.  After being down 582 points the previous week and looking like Major Wave 3 down was starting, the Dow rallied for 530 points by mid-week, before reversing course after the Fed meeting to fall 620 points in two days to close the week down 137 points.

Friday’s a triple witching expiration of the futures, index options, and stock options had a lot to do with the volatility.  When you add triple witching volatility to a complex consolidation pattern, you get EXTREME volatility.

The Dow is now down 348 points since The Tide turned negative on 3 December.  That’s 12 trading days of down-up-down trading action that has done but frustrate longer term traders.  On the other hand, if you were scalp trading during these 12 days using the techniques I talked about several weeks ago, that’s a different story.  You probably can’t wait until Monday!

Here’s what I said a few weeks ago in the WSR:

“So in the weeks ahead, I will be using the following conditions to trade this uncertain market. 

(1)  Trade shorter time periods.  I will be using the 60 and 30 min bars.

(2)  Patterns:  Remember, we always look to trade patterns.  That’s because patterns provide us with targets.  No pattern – No trade.

(3)  Indicators:  Once you see a pattern, look for the Arron Indicator to show a Trend. The initial entry is when BOTH the Arron and Money Flow indicators turn in the in the direction suggested by the pattern.  Then once in the trade, look to add to the position when the Fast Stochastic is either overbought or oversold.  If the Aroon is showing an uptrend, look to buy when the Fast Stochastic is oversold.

(4)  Money Management:  Apply money management techniques after the trade has been entered.  Half off at half way to the target, then let the rest ride until the trend is over or the momentum shifts.

(5)  Don’t get greedy!  Remember, IF the Dow is entering wave ‘e’ of a five wave pattern, it can truncate at any time.  That’s why you should focus on money management.  Trade small positions and taking profits quickly.”

This past week, because of the EXTREME volatility, I have been scalp trading time periods as short as the 3 minute bars, with most of my trading being done on the 15s.

Here’s the thing:  Once the market completes a major impulsive wave up, like the Dow did on11 November when the Tide turned negative, you MUST assume that some type of corrective wave will start to develop.   And because the impulsive wave appeared to be a wave 3, I had to assume the next wave would be some type of wave 4 pattern, most likely a triangle or a wedge. 

From Class, we know that triangles or wedge patterns have five waves, so right away, I knew that a lot of volatility was coming as the individual waves within the consolidation pattern play out.  This is why I mentioned that I was starting to scalp trade.  The Tide told me that Wave 3 had ended and some type of wave 4 would develop.  I didn’t know what type of pattern would develop, but I knew it would likely have 5 volatile waves. So I went into the scalping mode.

When I scalp, I trade smaller positions, take profits quickly, and get out of the market by the end of the day.  I don’t hold positions overnight.  There is NO point leaving money on the table at risk when you know that the market could easily reverse course the next day. 

So where does this leave us after Friday’s volatile session?

A lot depends on what happens on Monday.  If the market starts out higher, it’s likely that Friday’s move down was wave ‘e, completing wave 4 of the Wedge Pattern shown on the attached Five Waves to a Top Chart.

If the market starts to move lower, it’s likely that the Ending Diagonal Pattern is taking over and the Dow is headed below 16,000 during the next few months. 

So Monday will be a critical day.  Right now, only 1 of the 3 indicators I use to tell me when the market is trending is in the Trend Mode (see attached indicsator chart).  If the Dow closes down on Monday, it’s likely that all three Trend Indicators will turn negative.  If this happens, I will start buying and holding inverse index ETFs from the Dean’s List. Remember, I hold stocks and ETFs when the Dow is in the Trend Mode.

On the other hand, IF the Dow starts to move higher, I will be looking to scalp the stocks of two airlines, JetBlue (JBLU) and Delta (DAL), and cruise ship operator Royal Caribbean (RCL).  

Right now there are two elephants of concern to the Street.  One is imaginary, the other is real.  The imaginary elephant is interest rates.  Hey, the Fed only raised rates 0.25 percent. That’s nothing!  On the other hand, crude oil prices have been cut in half just since last summer and are now trading near $35 per barrel.  That’s a BIG deal.!

And even though the airlines and cruise operators borrow lots of money to finance their places and ships, the additional interest they might pay to borrow is nothing compared to the windfall savings they are now receiving from lower fuel prices. 

In addition, the problems in the mid-east and the refuge crisis in Europe has changed the vacation plans of a lot of northern Europeans.  When I was on my Caribbean cruise two weeks ago, I met many people from Sweden.  They told me that they always vacationed in Turkey, but because of the problems in that part of the world, they now plan to seek warmer weather in Florida and the Caribbean.  I found this very interesting!  So now, not only will the cruise ships be packed with all of us American and Canadian geezers, they will have European geezers as well.  Hmmm?  Full ships sailing at reduced (half) fuel costs?  It’s no wonder why RCL is moving higher.

Last week, JBLU was highlighted by Emeritus for the Honor Roll.  Since then it has fallen to its 200-day moving average support. In doing so, it has formed a nice a-b-c pattern to complete a possible wave 4.  RCL appears to have completed its wave 4 pattern last week.  It was actually up almost 2 points on Friday.

BTW, last week, I mentioned that Emeritus highlighted Apple (AAPL) as a short for the Honor Roll.  Back on 28 November, I said that that Apple (AAPL) was concern as it appeared to be forming a major Hockey Stick Pattern.  Here’s what I actually said:

“Although the stock has rallied along with the market during the past few months, it is still in a downtrend.  The recent high made earlier this month looks more like a retracement wave than the start of a new Bullish pattern. Students might want to watch the 111 level as it will be critical the performance of AAPL during the next few months. As long as the stock stays above 111, the odds suggest a move toward 122.69. However, IF 111 is broken, it would signal the start of a decline in the technology sector.” 

AAPL was trading at 117.81 when it was mentioned.  It closed at 106.03 on Friday.  If the Dow is going to move higher in the Five Waves to a Top Pattern, Apple MUST participate and move back to the 116 level.  If it can’t do this, we’re not going to see a Santa rally.

Have a great weekend

That’s what I’m doing,

h

Market Signals for

12-21-2015

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.