Weekend Strategy Review February 13, 2016

Posted by OMS  at February 13th, 2016

The Dow rose 314 points on Friday, closing at 15,974.  It was down 231 points for the week.  The NASDAQ was up 71 points on Friday and down 26 points for the week.

It appears that wave ‘c’ up of Major Wave 2 up is underway.

In Friday’s Comments I talked about how Thursday’s low was likely the completion of wave ‘b’ down of a complex a-b-c structure for Major Wave 2 up.  So today, assuming that wave ‘c’ up is underway, I want to make a few projections about how this wave should unfold.  It’s always good to understand how wave ‘c’ up should develop in theory, so IF the market does starts to rally, you will know what to expect.  Whether it happens exactly like it’s supposed to doesn’t really matter.  The market usually never traces out exact patterns.  But the following discussion should give you a few things to watch for as wave ‘c’ up unfolds.

For starters, I’m going to assume that the 20 January low of 15,451 was Major Wave 1 down of large degree Wave III down in a Major Bear Market that started last summer.  Everything since the January low has been associated with Major Wave 2 up within large degree Wave III down.  As long as the 20 January low holds, I have to assume that all the volatility we’ve been seeing for the past few weeks is part of Major Wave 2 up.

So far, it appears that wave ’a’ up and ‘b’ down of Major Wave 2 up have been completed.  It also appears that Friday’s rally was the start of the wave ‘c’ up required to complete Major Wave 2 up.

If we look at how Major Wave 2 has unfolded so far, it’s pretty clear that wave ‘a’ was a simple a-b-c structure.  Wave ‘b’ down consisted of 5 waves down, which is very unusual for a ‘b’ wave.  Usually the ‘b’ wave of a retracement pattern takes the form of a simple a-b-c pattern, so the pattern between waves ‘a’ and ‘b’ appears to be reversed.   Again, this is very unusual. 

From a timing perspective, wave ‘a’ up took 8 trading days to complete.  Wave ‘b’ down also took 8 trading days to complete.  So if we apply the Principle of Alternation to the wave structure, wave ‘c’ up should be a relatively straight up affair that should take either 4 days or 16 days to complete. 

The Bollinger Bands on the Dow are relatively narrow now, so it’s possible that the wave ‘c’ rally will be relatively quick.  But I wouldn’t bet the farm on it.  ‘C’ waves in a complex wave 2 structure have a tendency to form Ending Diagonals.  And if this happens, it’s likely that even though wave ‘c’ will have an upward bias, it will likely have a lot of volatility associated with it.  Also, IF this happens, the wave will likely take longer to develop, so right now I have to favor the longer 16 trading day time period.

As for where Major Wave 2 will complete, the most likely scenario is somewhere between the wave ‘a’ high of 16,585 made on 1 February and the 200 day moving average of 17,114   With prices now significantly below the 200, the moving average is dropping rapidly, so if the rally takes 16 days to unfold, the 200 will likely be closer to 17,000 by the time the rally completes.

So for now, I’m gonna say Major Wave 2 up should complete between 16,585 and 17,000.  This means that as a minimum, the Dow should have another 600+ points of upside rally to go before things start to get complicated.

Right now there are a lot of traders short this market.  Thursday’s late afternoon rally and Friday’s continuation was in large part driven by traders who were scrambling to cover their shorts. Expect this to continue.  It’s what happens in Bear Markets.

In a Bull Market, the market crawls higher with fast declines.  In a Bear, it’s just the opposite. The market tends to decline slowly at first, punctuated by brief rallies.  This is what we’re seeing now.  It’s what waves 1 and 2 are all about.  They are setting the stage for what should be happening in about a month from now.  That’s because once Major Wave 2 up completes, Major Wave 3 down will start to unfold.  And this wave should be the third wave within the large degree Wave III down sequence.  This is when things should get really ugly.

So start preparing yourself.  Think about how you are going to position yourself in the weeks ahead IF the market does rally back above 16 600+.

I already know what I’ll be doing.  In corrective waves, I scalp trade.  This is what I have been doing for the past few weeks.  But once the pattern and my indicators tell me that the corrective wave is over, I start holding my positions.

Short Term Stratgy (Until Wave 2 up completes): For the next few weeks I will continue to look for scalp trades to the long side, mostly in energy stocks.  If DIG replaces DUG on the Dean’s List, I will start holding these stocks.  Last night, DUG was near the bottom of the Dean’s List, so it could drop off the List early next week.  The pattern on most energy stocks suggests higher prices.  And with March-April getting closer every day, I want to favor energy. 

Right now, there are only two energy stocks on the Member’s Watch List, GPOR and SLB.  Both had nice pops on Friday.  If energy continues to rally, which is what I expect, we should see more energy stocks start to appear on the List.  But for now, I’m just trading GPOR and SLB.  If DIG and other energy stocks start to appear, I’ll start holding energy.  With a negative Dean’s List and a neutral Tide, I’m still scalping.

Longer Term Strategy: Start preparing yourself (and your clients) for the completion of Major Wave 2 up. Once this rally completes, the odds ar high that large degree Wave III down will take the markets to significantly lower levels.

The markets will be closed Monday for the President’s Day Holiday.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

02-16-2016

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