Professor’s Comments December 2, 2014

Posted by OMS  at December 2nd, 2014

The Dow fell 51 points, closing at 17,777. Volume was heavy, coming in at 128 percent of its 10 day average.  There were 144 new highs and 240 new lows.  Note how the number of new lows is now higher than the new highs. Also note that both numbers are now very high. This is not somethiong you want to see if you are Bullish. It is usually a sign of trouble ahead.

The Tide has turned negative.  The last time The Tide turned negative was on 8 September with the Dow at 17,111.  This led to a decline of over 1,250 Dow points.

After this decline, The Tide turned positive on 20 October with the Dow trading at 16,400.  This led to a rally of over 1,400 Dow points.

This is why I ALWAYS trade in the direction of The Tide.

However at this point, the Dean’s List and PT indicators are still positive.  So it’s still a bit early to be getting aggressive on the short side.

Remember what I do in The Professor’s Methodology.  I use The Tide to measure the internals of the market, and then use The SIGN to trigger the actual trades….always in the direction of The Tide.

So right now, I can’t be trading the long side because The Tide is negative.  However most of the inverse stocks and ETFs that I want to trade have still not appeared on the Dean’s List.  And the SIGN requires three things before a stock or ETF can be purchased.  It must be on one of the Lists, have a pattern, and the indicators MUST turn in the direction of the trade.  This has not happened yet.

I remind you that we saw the same thing happen back in early September.  The Tide turned negative on 8 September giving us an early warning that the breadth was weakening.  However the Dean’s List did not turn negative until 25 September. 

The List started to turn negative on 19 September when TWM and RWM, the two inverse Russell 2K ETFs, appeared on the List.  This is why I started to trade the Russell.  The Dean was telling me that it was clearly the weakest index.

This is what I expect will happen again.

At this point, it is pretty clear that the Russell is still the weakest index of the 4 majors..  While the Dow, SPX and NASDAQ have made new highs during the current rally, the RUT has not.  And during the past two days, while the overall market has seen moderate declines, the RUT has been a disproportionate loser. Small cap stocks are usually the first to show weakness in a market decline.

Yesterday the DMI and P-volume on TWM, the inverse Russell 2K ETF, turned Green.  The lone RED holdout is the fast MACD, my momentum indicator.

So all I’m doing now is waiting for TWM appear to on the Dean’s List and see its MACD turn positive.  I’m being patient.

Yesterday I received an interesting question from Charles G.  After reading my comments on crude oil this past weekend, he wanted to know if there was an inverse relationship between oil and the utilities?   This caused me look at a few charts before responding to Charles.  Here’s what I said:

Off the top of my head, I would have to say that I’m not aware of any direct relationship between oil and utilities.  Utilities, because they are large borrowers of money, tend to be more related to interest rates.

When I overlay TLT, the long bond ETF, on top of ED, there is a very close correlation.

Knowing this, you might want to watch for TLT or TMF to appear on the Dean’s List before you buy utilities.

Waiting.

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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