Professor’s Comments April 23, 2014

Posted by OMS  at April 23rd, 2014

The Dow rose 65 points, closing at 16,514.  The Dow was actually up over 100 points intraday yesterday, responding to the Small Change in the A-D oscillator which called for a Big Move.  Volume was moderate, coming in at 94 percent of its 10 day average.  There were 128 new highs and only 4 new lows.

It appears that the markets are finally breaking out of their month long consolidation pattern.

Yesterday was the second day in the past week that The Professor highlighted over 40 new longs.  Forty is not the number of new longs that I would like to see to generate a new Professor Buy Signal.  But taken together with the recent VIX Buy Signal and a Dean’s List that has turned positive, it appears that The Professor is saying that that the markets…or at least some of the markets, are going higher.  I say ‘some of the markets’ because at this point, while the DMI on the Dow (DIA) has turned positive, the DMI on the NASDAQ-100 tracking ETF, QQQ, is still negative.

In other words, The Professor seems to be saying the markets will likely chop higher.  Right now he’s only seeing a selective rally.  But that’s OK, it’s still early. If the NASDAD decides to join the party in the next few days, the strength of the rally will start to increase. But meanwhile, I plan to trade stocks from some of the strongest sectors.

Actually, I’m already doing this.  Several weeks ago, my Lists and algorithms, like Emeritus, were highlighting stocks from the energy sector.  We saw how this turned out.  While the overall market was correcting, with some of the weaker sectors getting hammered, stocks from the energy sector were holding up nicely.  Then when the market started to turn around, just about all of my energy stocks started making new highs.

During the past two days, I have received several emails from students asking about the new sector analysis algorithms I have been talking about.  Actually, these algorithms are nothing new.  I’m just using them in different way.

What I have been doing for the past few weeks is applying these algorithms to the major sectors of the S&P 500.  Because the Members Watch List is small, and I would like to keep it that way for other reasons, I’ve been using the stocks in the S&P 500 to generate ‘composite’ charts of the various S&P sectors and then using my algorithms to rank these sectors on the basis of Relative Strength.  By generating a ‘composite’ chart, it also allows me to see when a particular sector is starting to trend. 

This is how I determined that energy was starting to trend higher several weeks ago.  And once I knew that energy was not only the strongest sector, but that it was starting to trend higher, all I needed to do was go to the Dean’s List and select one of the energy ETFs like DIG, or HAL, SLB, or GPOR from the Member’s Watch List.  It was actually pretty easy.

As I mentioned in my last Update Class at UNF, this is something that I plan to do more of in the weeks ahead.  The only problem is that it takes additional time to generate, analyze, and post these composite graphs, so for the time being, I plan to do this sector analysis on the weekend.  But given that the sectors don’t change that much from one day to the next, performing this additional analysis on the weekends seems entirely appropriate.

Last night I posted a composite chart of the Big Pharma-Biotech Sector that shows how this particular sector is starting to trend.  So with this knowledge, I can now go to the Member’s Watch List and look for stocks from this sector.  The first Big Cap Pharma stock I see on the List is Allergan, AGN.  It’s at the very top of the Member’s Watch List. However it appears to be extremely overbought after yesterday’s takeover bid from Valeant Pharma that pushed the stock 22 points higher.  So the obvious question is how much of AGN’s trading action is impacting the Relative Strength Ratings of the Big Pharma Sector and the ‘composite’ chart?Hmmm?  

When I move down the Member’s Watch List, I also see Merck, MRK. It has a pattern very similar to the pattern on AGN. The indicators on MRK are showing that it too is just starting to trend higher.  I also see a similar trending pattern on JNJ, a stock from the same Big Pharma Sector that is not in the data base for the Members Watch List.

So now I know that even though AGN is leading the MWL, the sector analysis is not an anomaly. Other stocks from the same sector are also starting to trend.

Buying strong stocks that are beginning to trend does not guarantee that the trend will continue.  There are never any guarantees in trading.  But having this knowledge sure places the odds in your favor, and that’s all you can ask indicators and Lists to do.

Holding energy, and starting to look for a few stocks from the Big Pharma-Biotech Sector.

That’s what I’m doing,

h

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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