The Dow fell 252 points, closing at 16,907. Volume was extremely heavy, coming in at 139 percent of its 10-day average. There were 47 new highs and 263 new lows.

Since traders returned for the New Year, volume on the NYSE has been increasing as prices decline. This is what you would expect if Major Wave 3 down is starting. It’s exactly what happened just prior to the market crash last August.Rising volume on declining prices is never a good thing if you’re Bullish.

Last night China closed its markets early after another 7 percent decline. It was the second day this week that trading was halted after a 7 percent decline. This will likely cause another down day on Wall Street once trading begins today. One of the reasons for this is Apple.

In early December, I talked about Apple (AAPL) after Emeritus highlighted the stock as a short for the Honor Roll. The stock was a concern because 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 (November) 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 to 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 first mentioned. It closed at 100.7 yesterday after declining just over 2 points. Yesterday Apple announced a 30 percent reduction in the production of iPhones. The reason cited was the slowing of China’s economy which is Apple’s second largest market. Apple’s stock is part of the three major U.S. market indexes, so another 7 percent decline in China’s market will likely send U.S markets reeling today.

APPL reached a low of 92 during the 24 August market crash. I would expect this low to be re-tested and broken in the days ahead as APPL leads the overall market and technology stocks lower.

Yesterday I mentioned that Tuesday’s small retracement rally appeared to be minor wave 2 of Major Wave 3 down. I said that if this was the case, wave 3 of 3 down could be ready to start. I also said that this next down wave should be impulsive. Yesterday the Dow fell 252 points. That’s impulsive!

Just remember that the Wave 3 decline will NOT be straight down. It might feel like a crash, especially during the heart of the impulse wave. But once minor wave 3 completes, there should be a wave 4 rally before wave 5 of Major 3 down takes the Dow below last summer’s low. I’m currently expecting minor wave 3 of Major 3 down to complete near the 16,000 level. This is where the Ending Diagonal Pattern started back on 29 September, so it’s a likely first target.

I continue to establish positions in inverse index ETFs from the Dean’s List, and in individual stocks highlighted as shorts on the Honor Roll. A chart showing a trade in Mellanox Tech (MLNX) that I made yesterday is attached as an example. I’m entering these positions using the shorter term bars, like the 10, 15, or 60s. But now that the impulse wave appears to be underway, I’m entering larger positions initially, and taking a few bucks off the table when I have a profit and then letting the rest of the position ride.

 

One note of caution. Remember that even though it’s likely that Major Wave 3 down is underway, we need to be concerned about the President’s Plunge Protection Team (PPT. If panic starts to develop, expect the PPT to step in and try to arrest the decline.

I’m not sure that they have the tools to do this right now, but they will probably try. This intervention could spark a sharp rally or two during the decline as traders are forced to buy back their shorts.
This is why I believe students should continue to take some money off the table when they have a profit and let the rest ride. Basically I’m entering my short positions exactly like I would if I were scalping, only now once I have a profit, I’m selling about half the position and letting the rest ride. I feel the risk-reward is heavily in favor of the downside now, so I’m willing to hold a few shares overnight.

The Professor
http://oneminutestock.com

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.