Weekend Strategy Review November 22, 2015

Posted by OMS  at November 22nd, 2015

The Dow rose 91 points on Friday, closing at 17,824.  It was up 579 points for the week.  The NASDAQ was up 31 points on Friday and up 177 points for the week.

It was quite a week.  After being down 666 points the previous week, and looking like Major Wave 3 down was starting, the Dow reversed course and turned Bullish.  Events in Europe had a lot to do with the reversal as scared foreign money started to move into the U.S. markets, checking the previous week’s decline.

But will this foreign money be enough to change the overall direction and start a new Bull market?  I think not.  However it might be enough to push it to new highs in the weeks ahead.

As I‘ve been talking about for the past week, once the Dow pushed past the 17,668 level, it brought into play a new ‘Fifth Wave’ scenario off the 24 August low.  If you look at a chart of the Dow, you can see the four waves off the 24 August low, with wave 4 ending on 16 November.  Then once prices moved above the 17,669 level, invading the territory of the minor wave 2 low, the Major Wave 3 down scenario dropped off the Board.  Some other scenario had to be taking place.

The Ending Diagonal scenario is still a possibility. This scenario allows for prices to rise to 17,978 before starting its next wave down. However now that the Dean’s List and Tide have turned positive, the odds for this scenario are low.  But the Money Flow indicators are still not showing a robust inflow into the markets, so it’s likely that the Dow will meet strong resistance near the 17,978 level.  On Friday, it reached a high of 17,914 before pulling back about 90 points into the close.  BYW, Friday’s intraday rally of 180 Dow points was the Big Move predicted by the small change in the A-D oscillator.

So where does all of the above leave us now? 

Well, once the 17,688 level was broken to the upside, I had to make the Fifth Wave or ‘e’ wave my primary scenario. This scenario suggests that prices will re-test the 18,350 level, possibly higher. The Dean’s List and a positive Tide support higher prices.   Also, when I ran The Professor algorithm last night, he had a strong positive bias with 39 longs.  .

But given that both scenarios currently on the Board are only short-term Bullish scenarios, the question really has to do with trading these potential rallies in an extremely volatile environment.

Clearly one can always move to the sidelines and wait for wave ‘e’ up to complete before becoming Bearish again.  But what if the Dow starts to move past 17,978 putting an end to the Ending Diagonal Pattern. What then?  If the Ending Diagonal drops off the Board, we’re still left with a developing ‘e’ wave that can move beyond 18,350 or truncate at any time.

So what to do?

In my Comments yesterday, I showed you a 60 min chart of the Dow (DIA) and mentioned that I would be talking about how I’ve been using it to trade during this recent period of extreme volatility. 

But before I begin, I want you to take a quick look at the attached chart to see how it predicted yesterday’s early rally.  See how the market started to move higher from the small Hockey Stick pattern that had formed.  Pretty cool, huh?  The pattern together with the small change signal from the A-D oscillator was right on.

As I always say, most of the information you need to trade comes from the pattern on the chart, and NOT from the indicators.  I only use the indicators to trigger a trade.

So what are the patterns and indicators saying now?  Well, let’s take a look….

As you can see from the 60 minute chart, they are suggesting higher prices.  The DIA is clearly in the Trend Mode as depicted by the Aroon Indicator.  I introduced and talked about the Aroon Indicator several weeks back, but essentially it suggests that a stock is in a trend anytime the indicator rises above the 70 level.  If the Green line is above 70, the stock is in an Uptrend.  When the Red line is above 70, it’s in a down trend.  When both lines are below 70, no trend is in place.  So going into Friday, the Aroon was telling us that the DIA was in an Uptrend.

We also knew that money was flowing into the security as the 14 period Chaikin Money Flow indicator was positive.  I have also discussed the Chaikin in previous Update Classes and articles.  But for those students who are not familiar with the indicator, it can be used as a substitute for indicators like the Positive Volume Indicator on FreeStockCharts.com and AIQ’s P-Volume.  It basically measures the same thing.

But today I want to talk about the Fast Stochastic, the third indicator on the chart.

In my PT Class, I talk about how I always use three indicators to trade the markets.  So after I determine directionality with either the DMI or the Aroon, I measure the amount of fuel in the tank with something like the Chaikin or PVI.

Then I need to measure momentum.  This is really a key indicator, especially in volatile markets.  For momentum, you can use an indicator like the fast MACD or a fast stochastic.

For the purposed of today’s discussion, I want to focus on the Fast Stochastic, an indicator on the Think or Swim trading platform available from several brokers. The Fast Stochastic is also an overbought-oversold indicator similar to the 2-period RSI Wilder.  However I like it because when it crosses the zero line it also tells me when the momentum is changing.

So it actually has two uses.  It is fast enough to identify overbought and oversold conditions for scalp and/or Rifle trades, but slow enough so it can identify momentum shifts without causing too much confusion.

If you look at the 60 minute chart of the DIA on Friday, 6 November, you will see a Red Line that indicates where the Money Flow and Aroon indicators turned negative.  But notice that prices did not start to fall until the following Monday when there was a shift in momentum. The Red oval identifies the overbought condition where a short trade could have been entered. 

Remember, with Rifle Trades, I’m always looking for periods where a stock has entered the trend mode and then looking for a pullback to enter the position when it is either overbought or oversold.  If the Money Flow indicator confirms what the Aroon Trend indicator is saying, it makes for an even stronger trade.  But I’m primarily looking for patterns and then use the indicators as a decision aid to trigger the trade.

Then once the price approaches my target, I look for a momentum shift to exit the trade.

For example, this past Monday, 16 November, after the target from the previous week’s Hockey Stick pattern had been reached near the 172 level, the Fast Stochastic crossed above the 50 level indicating that the momentum had turned positive.  This was a sign that the downtrend was over.  The Trend and Money Flow indicators turned positive the following day signaling the start of a new up-trend, which continued into the weekend.

So in the weeks ahead, you might want to think about using these new indicators to trade this uncertain market.   

Here’s what I’ll be doing:

(1)  Trading 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 a continuation pattern…like the Hockey Stick.  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.

Have a great weekend.

That’s what I’m doing,

h

BTW, short-term traders might notice that Friday’s late pullback caused the Fast Stochastic to approach oversold territory.  So once again we have an oversold condition with a pattern and both the Aroon and Money Flow indicators being positive.  Will this prove to be another short-term buying opportunity?  Look for a momentum shift, where the Fast Stochastic moves above the zero line.

Market Signals for

11-23-2015

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.