Once again, the Dow rallied early for almost 250 points, only to finish down 111 points at 17,069. It was the second consecutive day where the market could not hold its large early gains. I don’t remember ever having seen two days of trading with such severe intraday volatility. Volume was heavy, coming in at 126 percent of its 10-day average. There were 23 new highs and 434 new lows.
The Fed will conclude its 2-day FOMC Meeting today and will be announcing its decision on interest rate policy at 2pm. I find it hard to get excited about the Fed anymore, but there appears to be a lot of interest in whether the words ‘for a considerable time’ will be dropped from the statement.
Last night the A-D oscillator came in with another EXTREME reading. However this time the reading of -253.67 was not only extremely oversold, it also represented a small change from the previous day’s reading of -281.6. As I mentioned yesterday, markets usually rally within 1-2 days of EXTREME readings like this, the exception being when a crash is taking place. So now with a small change reading from the A-D oscillator, we need to be on the look out for another Big Move.
The Dean’s List, Tide, and cockpit indicators remain negative. As long as these indicators stay negative, I will continue to look for opportunities to short the market.
So far the decline since 8 December has been almost straight down. There has only been one winning session in the past 7 trading days. And most of the declining days have been characterized by moves over 100 points. That’s too much decline to fast, even if a crash is taking place. The market should start to find a bottom somewhere between current levels and 16,850 and rally. It’s likely that this rally will be wave 2 up.
The seasonality also supports a rally. The time between now and the end of the year is usually very Bullish. The only time that it has not been Bullish recently is when some type of government imposed ‘cloud’, has been placed on the markets. However now that the House has passed a spending Bill to keep the government running into late next year, this shouldn’t be an issue.
So if the market reacts positively to the Fed announcement, it is very likely that a significant rally could develop from current levels and carry into early next year. Like I said above…this market is EXTREMELY oversold now. I still believe that the market will trade below the 16,800 level and likely a LOT lower. But remember, it will likely NOT fall straight down. There will have to be retracement rallies along the way. And right now, all of the conditions are in place for a rally to start, either from current levels or from levels closer to 16,850 which is now only about 200 points away.
Here’s the thing: IF the market does start to rally, the odds are overwhelming that the rally will not retrace all the way back to the 5 December high of 17,991. However a 50 percent rally back to 17,530 is very likely. This assumes that wave 1 down bottomed yesterday at 17,067. If the Dow continues to fall after today’s Fed announcement, this retracement level will have to be adjusted accordingly.
The thing I will be watching is The Tide. As long as The Tide remains negative, I will be looking to fade rallies above 17,427.
I will also be watching energy stocks like Halliburton (HAL) and Schlumberger (SLB) for possible scalp trades on the shorter term bars. Halliburton at 38 is EXTREMELY oversold. The HS pattern suggests a target closer to the 32 level, however before that can happen, it’s likely the stock will bounce several points higher before the next leg down begins, probably in January. This is not a trade for the risk adverse, but the downside momentum appears to be waning and is even showing positive divergence. Energy stocks have led the market lower. If the market does start a wave 2 retracement rally, I would expect the beaten down energy stocks to lead the way. Remember…scalp trades only! No holding overnight.
I should also mention one other thing. Today is 17 December. In other words, there are now only 8 days before Christmas and 15 days before the new year. Yeah, this is a usually a Bullish time. But you don’t have to trade it. If you made a few bucks by following The Tide and my Lists, you might want to take some time off and enjoy the Holliday season. I don’t think you’re gonna miss much in the next 2-weeks. If the market does start a wave 2 rally, remember, all of the up-down-up action of a wave 2 will make it very difficult to trade.
During the past week, we’ve been trading an impulse wave to the downside. The odds were high and in our favor. But now that the Dow has fallen over 900 points, the odds for additional decline in the short term have decreased. And IF the market does start a wave 2 retracement rally, the low odds you get with counter trend trades can make you wonder why you’re doing them. So maybe the better thing to do is to take some time off and relax. Take some time to think about what you did right and wrong during the wave 1 decline. By reviewing your trades, it might help you become better prepared to attack the markets early next year, when the odds will likely be more favorable. Remember, you should NOT trade all the time; only when the odds are in your favor.
Waiting for the Fed announcement.
That’s what I’m doing,
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