Weekend Strategy Review January 3, 2016

Posted by OMS  at January 3rd, 2016

The Dow fell 179 points on Friday, closing at 17,425.  It was down 127 points for the week.  The NASDAQ was down 58 points on Friday and down 41 points for the week

Since the beginning of November, when the Dow first entered its current Wedge Pattern, it has made six moves, up or down, of over 600 points.  If you add in the 239 points of the current decline, the total comes to a whopping 4,406 Dow points.  In other words, the total points in all of the up-down-up-down moves in the Dow in the last two months is equivalent to what normally occurs in a major crash!   Only this ‘crash’ has been sideways.  If those points were subtracted from the Dow’s high, it would have taken the index down to 13,950. So this sideways crash… if you want to call it that, was far worse than the 3,000 point decline that occurred last summer.

If you were a buy and hold investor for the past two months, chances are that you are pretty frustrated by all the volatility.  However, if you scalp traded the moves like you learned in Class, or stayed on the sidelines, you are probably feeling pretty good about now.

But I realize that scalp trading isn’t for everybody. I only do it to get paid.  It’s what I do when the market begins to consolidate after a major rally wave, like the one we had in October.  If you don’t scalp trade during consolidation periods, all of the gains you make one day will tend to evaporate the next as the market forms the various legs within the Wedge.  This is what happens.

The bright side to all of this is that the market will not stay in the current Wedge Pattern forever.  It will break out one way or another.  And the longer prices stay in the Wedge, the more volatile the breakout move will be.  The only problem is that as of now, we still can’t be sure of the direction of the breakout.  As long as the Dow stays above 17,100, I have to favor an upside breakout with a move toward 18,350+, possibly higher.

Friday’s decline was driven by tax selling.  There was a pile of sell orders at the close that caused the Dow to decline in the last hour. These sell orders will probably not be present come Monday, and now that the overbought conditions from last Tuesday have been relieved, we could see a rally to start the New Year.

After Friday’s decline, the cockpit indicators are back to mixed again.  However, my new trend indicator has crossed the zero line and is now back in negative territory.  It’s still has not entered the Trend Mode, and until it does, it’s likely the consolidation within the Wedge Pattern will continue.

One of the things I’m been doing while waiting for stocks to break out from the Wedge (besides scalping) is evaluating the Emeritus algorithm with various indicators as triggers.  Only now I’ve been running the algorithm using weekly data.  This tends to highlight stocks that are entering longer term trends, something I know will interest many of my students.  I’m doing this analysis now, so IF the market breaks higher and starts trending, I want to be able to identify stocks that I can buy and hold.  So far, the results to date have been very successful, especially when the stocks highlighted are triggered by a change in the direction of my new Trend Algorithm.  

S IF the Dow starts to break out of the Wedge Pattern, I will start talking about some of these trending stocks for your consideration.  But right now, the market is NOT tending, so there’s nothing to talk about.

One thing I did notice what I was doing my analysis for this WSR was that the number of stocks on the NYSE that were more than 20 percent off their highs reached 41.68 percent.  That’s pretty high considering that last summer, when stocks bottomed near the end of the August, the number was 46.86 percent.  The number reached a high of 52.0 on September 28, which marked the start of a 1,996 point rally in the Dow that lasted into early November.

The reason I’m mentioning this number today is because since the September low, there have been 6 times when this number rose above 40 percent.  In every case, the market had a nice rally the following day.  Here’s the data:

10/14  40.6   10/15 Dow up 214 pts

10/21  40.0   10/15 Dow up 321 pts

10/27  40.0   10/27  Dow up 198 pts

11/13  41.0   11/14 Dow up 237 pts

12/11  42.0   12/14  Dow up 103 pts

12/18  44.6   12/21  Dow up 123 pts

12/31 41.5   01/04 Dow ???

So even though the Dow closed down on Friday and most of the cockpit indicators are negative, there’s still hope that we could see an upside breakout once trading starts in the New Year.  Nothing has changed as far as the patterns are concerned.  As long as the Dow stays above 17,100 and below 17,750, it will remain in the Wedge Pattern.  And as I said in the beginning of this WSR, Wedges are usually Bullish consolidation patterns, so for now I still have to remain positive.  This all changes if the Dow breaks below 17,100.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

01-04-2016

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