Professor’s Comments February 7, 2014

Posted by OMS  at February 7th, 2014

The Dow rallied for 188 points, closing at 16,628. After noting several days of oversold conditions and a ‘relatively ‘small change in the A-D oscillator, the rally was expected.  Volume was light on the rally, coming in at only 93 percent of its 10 day average.  The light volume tells me that there wasn’t a lot of conviction in the move.  It was mostly a result of short covering.  There were 43 new highs and only 36 new lows.

On the other hand, yesterday’s rally was impulsive, which makes me think that wave 1 down has completed and the retracement wave 2 up has started.  If this is correct, and it’s a Big IF, then wave ‘a’ up could have a bit more upside in it before wave ‘b’ down comes in.

All this means that trading in the next few days will become very choppy and difficult   With the Dow now only 400-600 points from where I expect it to top, the odds are not very good for me to be trading the long side, nor are they attractive for any shorts.

There is also the possibility that yesterday’s rally was a wave 4 rally within Major Wave 1 down.  I doubt that this is the case, but it could be.

That’s why overall, I don’t like the odds.

The Dean’s List is still negative, and the cockpit indicators are mixed.  And while The Professor woke up yesterday, he still hasn’t issued a Buy Signal.   Going into yesterday, we had a VIX Buy Signal, a small change signal, and EXTREME oversold conditions on the Board.  This is what produced yesterday’s 188 point pop.  But now that the pop has occurred, the markets will need a lot more than oversold conditions to sustain any additional moves from this point.  Some of this could come from today’s Jobs Report.  But I doubt it.

What I expect will happen is that after the report is digested, most traders will still be left confused.  This confusion will translate into the choppy trading that will produce the minor a-b-c waves of retracement wave 2.

If I were to take a long trade now, it would have to be from lower levels. A decent entry point for me would be near or below 15,500 on the Dow or 1750 on the SPX.   Because the odds do not favor anything but a small drop in equities at this point, I really don’t want to short this market until the Dow gets closer to 16,000.  And IF the Dow makes an a-b-c move in getting back to 16,000, it would increase my confidence in any short trades or inverse ETFs..

The BLS will release the Jobs Report at 8:30 this morning.  The market’s reaction to the report should be very interesting.

Probably the best ‘trade’ from current levels will be in the metals.  If the market interprets the report as positive, it could end the recent rally in gold prices and send the metal back toward the 1150 level. If this starts to happen, it should become immediately obvious in the movement of gold stocks. The problem is that the Jobs Report is scheduled to be released at 8:30 and the New York markets won’t open until 9:30.  So a good portion of any move could be over before the market opens.  However, at this point, I would rather give up a few points in the trade for the additional clarity.

Then by having potential targets for gold (the metal) and DUST, the inverse gold ETF, we should be in a better position to assess the risk-reward of these trades.

Waiting for the Jobs Report.

That’s what I’m doing,

h

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