Professor’s Comments August 16, 2013

Posted by professor  at August 16th, 2013

The Dow plunged 225 points yesterday, closing at 15,112.  It got as low as 15, 094, less than 100 points from my target.

More and more traders are becoming concerned about many of the things we talked about a few weeks ago.  And yesterday, this caused a few to do some impulsive selling.  They panicked.  I believe these same sellers are going to be very sorry they sold a few weeks from now.  If they wanted to sell a few shares, they should have should have done so when the Dow was above 15,600.  Not now.  But don’t worry about what’s going on.  It still appears that it’s all part of the normal wave 2 corrective process.

Here’s the thing: As we descend toward our target between 14,850 and 15,000, the folks on CNBC will start talking more and more about how the world is coming to an end. They don’t have a clue about how the market needed a wave 2 correction, and now that it is occurring, remain clueless and are fanning the flames.  They’re gonna give you all sorts of reasons for the decline: things like another fiscal crisis, problems in Egypt, tapering, whatever.  In New York City, they have a word for what I want you to do: Forgetaboutit! 

There will always be some type of event occurring in the world to cause traders concern.  Just understand that these events are necessary. They help the markets to correct.  When the market becomes overbought, like it was two weeks ago at 15,658, the anxiety that these news events cause are what triggers people to sell.  The events create uncertainty.  And where there is uncertainty, traders become risk adverse, and do less buying.  We are seeing this happening now with the light summer volume.  When the buyers take a break from their normal buying, the market corrects.   It’s pretty simple.

If you want a few examples, just think about what happened last December, when everyone was worried about the Fiscal Crisis.  Nobody bought.  Traders were on Christmas Holiday.  But once the ‘Fiscal Crisis’ was over, the cloud disappeared and the market rallied hard for 4 months.

The rally continued until folks started to worry again.  Only this time it was about the ‘sequester’.  Did traders really believe that the government would run out of money?  Did they forget about the printing press?  Did they really believe that a government that gives away cell phones, and spends billions on useless stuff, can’t come up with a few bucks to keep itself running?   I never worried that the mandated cuts would cause the government to shut down to the point where the police would stop policing, or the Air Traffic Controllers wouldn’t be there to help planes to land.   And once the “chicken little’s’ on Wall Street realized that airplanes would not be falling out of the sky, the market rallied.  

So whatever the concern that is causing this current correction…you pick, I don’t care…I believe that the same thing will happen this time. Once the correction ends, I believe we’re going higher.  Possibly a lot higher.

But while this correction is occurring, if you listen to the folks on CNBC, you will find yourself in a very confused state.  That’s because they will drag one expert after another on the show, offering all sorts of opinions. They will get you so confused that you will never be able to sort out who’s right and who’s wrong.  And if you become confused and anxious, you will never find the nerve to step up to the bar and Buy when the time is right. That’s why I want you to think about this now, before we get to 15,000.

Think about it this way.  As we approach 15,000 on the Dow, it will be very similar to flying an airplane in the clouds. If you rely on your ‘normal’ sensors, like your eyes and ears, you will become disoriented when you lose sight of the horizon.  This is when you will need to rely on the indicators, not your senses. That’s why pilots train under these conditions. Because they know they will be flying into clouds from time to time.

So we’re in the clouds and approaching 15,000. Are you gonna panic? Or are you gonna remain calm and rely on your indicators?

Think about this too:  If you followed your indicators and bought Apple when it turned Green after a TLB pattern, you would be up about 70 points now.  But nobody on TV wanted Apple.  It was on the Dean’s List with a pattern when it turned.  It had all of the elements of the SIGN.  Same for Royal Gold.  Nobody wanted to have anything to do with gold a few weeks ago.   But RGLD had formed a TLB Pattern, and appeared on the List just before its indicators turned positive.  Now RGLD is up over 11 points and leading the List.

This past week, we saw how by following the indicators, I saved a few bucks by NOT buying Gilead Sciences, GILD, because the indicators never turned positive in a Rifle Trade that I really wanted to make.  We also saw what happened yesterday, when the two Rifle Trades I have been talking about recently remained Green on a very bad day for the market.  One (TBT) was up over 2 points, and the other, SLB, was only down slightly.  Both stayed Green all day on the Daily’s and 60s telling us not to worry.  Hmmm?

So follow the indicators, not the commentators.  Understand that what’s happening now is a normal wave 2 correction.  Yesterday’s impulsive decline was likely wave 3 of wave ‘C’ down.  Anytime you see an impulsive wave like the one we got yesterday, you must always look for a wave 3 fit.  And because yesterday’s decline occurred within wave ‘C’ down, it’s now very likely that we’ll see a small wave 4 rally, and then one more final decline for wave 5 before wave ‘C’ completes.  Watch for it to develop.  Use your noggin and understand what’s happening.    

If you do this, you will know what to do when we start to see positive signals emerge once we get a bit closer to 15,000.  Let the others worry about what the commentators are saying.  I want you to follow the indicators.

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

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