Professor’s Comments January 3, 2014

Posted by OMS  at January 3rd, 2014

 The Dow fell 135 points, closing at 16,441.  The SPX dropped 16 points to 1831.  Volume was heavy on the decline, coming in at 111 percent of its 10 day average.  There were 90 new highs and 31 new lows.

It appears that the overhead pattern resistance I talked about last week took effect at the 1849 level vs.1860.  This wasn’t a surprise given that The Professor only had 49/49 stocks at the beginning of this rally.

On New Year’s Day, I  posted a chart of the Dow that showed The Professor’s Buy Signals for 2013.   You might want to compare the number of stocks that started the current rally with those of previous rallies.  It’s one of the three reasons I was cautious going into the end of the year.

The Professor’s weak Buy Signal told me that a year end Santa rally was likely, but probably needed to pause somewhere along the way. That’s why I mentioned 1860.

I believe this is what the markets are starting to do now.  Only instead of resting near 1860, they started to rest after hitting a high of 1849. The key word here is ‘resting’.

The Dean’s List and the PT indicators are still positive.  And as long as they remain positive, I will look at yesterday’s pullback as a rest period that will form a normal Blade to support the final move higher.  So while I expected this rest period, I thought it would occur after the first few trading days of January, when the market normally takes a breather.  But it appears that many of the institutions wanted to get started with their re-balancing earlier this year.  This re-balancing will likely cause a lot of choppy trading in the next few weeks.  I don’t like to trade choppy corrective waves.

The correction probably won’t change much in the larger scheme of things.  But please understand that it needs to happen if the market is going to move higher.  So during the next week or so, I will be looking to see IF a Blade starts to form between 1820 and 1849.  The lower portion of the Blade should not move below 1820 during this period, but it could and if it does, it will raise my third concern.  That the market is breaking down earlier than expected.  In other words, wave “e”, the final wave in the Ending Diagonal pattern, is truncating.

Last week I mentioned that the final waves of an Ending Diagonal Pattern have a nasty habit of truncating.  They don’t fully reach their targets.  The final rally starts by breaking above its upper trendline sooner than expected.  This is what we saw at the end of the “d” wave triangle.  This breakout causes the general public to become very excited.  They have been watching the rally from the sidelines, and finally decide to buy a ticket to ride.  They feel like they’re missing the train, so they jump on the last car out of the station.  This public participation is what causes the strong ‘over through’ in the Ending Diagonal Pattern.  But after awhile the public starts to discover that they’re the only ones riding the train.  A lot of the institutions got off at the last stop, so now there’s not as many of them on the train.  In the weeks ahead, IF this market starts to roll over, we’ll see even more institutions giving up their seats to the general public.  Then when all of the Big Boys are off the train, it will start to change direction and head south.  That’s how it works.

I’ll talk more about this in my WSR and how I plan to trade the final ride up, or the next Major Wave down.  But for now, all I want to do is watch to see IF a Blade develops. If it does, the train ride should continue for a bit longer. But IF we see the Dean starting to turn negative, it will be my signal that the ride is over. The Dean is the conductor on this train ride. If he says the ride is over, I’ll get off. It doesn’t matter if the train didn’t get me to where I wanted to go (just under 17,000 on the Dow).  If the conductor says get off, I’m off. 

BTW, I checked in with The Professor last night, and he was sleeping in his office chair.  The sign on the door said only 4 shorts, no longs.  If he wakes up, I’ll let you know. 

Watching.

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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The Dow fell 135 points, closing at 16,441.  The SPX dropped 16 points to 1831.  Volume was heavy on the decline, coming in at 111 percent of its 10 day average.  There were 90 new highs and 31 new lows.

It appears that the overhead pattern resistance I talked about last week took effect at the 1849 level vs.1860.  This wasn’t a surprise given that The Professor only had 49/49 stocks at the beginning of this rally.

On New Year’s Day, I  posted a chart of the Dow that showed The Professor’s Buy Signals for 2013.   You might want to compare the number of stocks that started the current rally with those of previous rallies.  It’s one of the three reasons I was cautious going into the end of the year.

The Professor’s weak Buy Signal told me that a year end Santa rally was likely, but probably needed to pause somewhere along the way. That’s why I mentioned 1860.

I believe this is what the markets are starting to do now.  Only instead of resting near 1860, they started to rest after hitting a high of 1849. The key word here is ‘resting’.

The Dean’s List and the PT indicators are still positive.  And as long as they remain positive, I will look at yesterday’s pullback as a rest period that will form a normal Blade to support the final move higher.  So while I expected this rest period, I thought it would occur after the first few trading days of January, when the market normally takes a breather.  But it appears that many of the institutions wanted to get started with their re-balancing earlier this year.  This re-balancing will likely cause a lot of choppy trading in the next few weeks.  I don’t like to trade choppy corrective waves.

The correction probably won’t change much in the larger scheme of things.  But please understand that it needs to happen if the market is going to move higher.  So during the next week or so, I will be looking to see IF a Blade starts to form between 1820 and 1849.  The lower portion of the Blade should not move below 1820 during this period, but it could and if it does, it will raise my third concern.  That the market is breaking down earlier than expected.  In other words, wave “e”, the final wave in the Ending Diagonal pattern, is truncating.

Last week I mentioned that the final waves of an Ending Diagonal Pattern have a nasty habit of truncating.  They don’t fully reach their targets.  The final rally starts by breaking above its upper trendline sooner than expected.  This is what we saw at the end of the “d” wave triangle.  This breakout causes the general public to become very excited.  They have been watching the rally from the sidelines, and finally decide to buy a ticket to ride.  They feel like they’re missing the train, so they jump on the last car out of the station.  This public participation is what causes the strong ‘over through’ in the Ending Diagonal Pattern.  But after awhile the public starts to discover that they’re the only ones riding the train.  A lot of the institutions got off at the last stop, so now there’s not as many of them on the train.  In the weeks ahead, IF this market starts to roll over, we’ll see even more institutions giving up their seats to the general public.  Then when all of the Big Boys are off the train, it will start to change direction and head south.  That’s how it works.

I’ll talk more about this in my WSR and how I plan to trade the final ride up, or the next Major Wave down.  But for now, all I want to do is watch to see IF a Blade develops. If it does, the train ride should continue for a bit longer. But IF we see the Dean starting to turn negative, it will be my signal that the ride is over. The Dean is the conductor on this train ride. If he says the ride is over, I’ll get off. It doesn’t matter if the train didn’t get me to where I wanted to go (just under 17,000 on the Dow).  If the conductor says get off, I’m off. 

BTW, I checked in with The Professor last night, and he was sleeping in his office chair.  The sign on the door said only 4 shorts, no longs.  If he wakes up, I’ll let you know. 

Watching.

That’s what I’m doing,

h