Professor’s Comments May 27, 2015
Posted by OMS at May 27th, 2015
The Dow fell 190 points, closing at 18,042. Volume was moderate, coming in at 106 percent of its 10-day average. There were 39 new highs and 77 new lows.
The Tide turned negative on Friday, so yesterday’s decline of 190 points on the Dow was no surprise. However, because the Dow did not continue to fall after it was down over 240 points raises a question with the pattern.
Was yesterday’s decline part or all of wave ‘b’ down in the a-b-c pattern I talked about last week? If so, it means that the Dow still has one more rally leg to go (wave ‘c’ up) before the pattern is complete. It would mean that the final leg up will likely complete slightly above the 18,351 level.
On the other hand, it could be that yesterday’s decline was the start of the initial waves down in the new Bear Market.
Yeah, I see that all of the cockpit indicators have turned Red. But until I see the Dow trade below 17,800, I can’t confirm that the new Bear Market has started. it’s still too soon to tell. Remember, it appears that the current pattern for the Dow is a Bearish Rising Wedge. The bottom of this pattern continues to rise. Several weeks ago, I needed to see 17,620 broken before I could say that the Bear Market has started. Now this key level has risen to 17,800.
I’m not concerned about missing the move down. I’m NOT! If 17,800 is broken, the Dow should fall quickly to below 17,000, with 16,500 likely.
Because yesterday’s decline lacked the follow through I wanted to see after the Dow was down over 240 points, I sold the Put I talked about last week. So now I just have my ‘trial’ positions on in DXD and TWM. If the Dow steadies today, I will likely just keep those positions and look to add to them if it appears that the Dow wants to move higher.
However IF the Dow starts to move impulsively lower, I want to get aggressively short. Like I said, I’m not concerned about missing this move, but I want to see the Bearish Rising Wedge pattern broken before I get too aggressive. So I’m keeping some of my powder dry just in case the Dow starts to move back above 18,300.
Here’s the deal: Right now, with The Tide, Dean’s List, and both Coaches being negative, I can not be long. All I can be is either short or on the sidelines. This is because even though all of my indicators are negative, a new down trend has NOT started. Check the CCI. It’s still only showing a reading of 17.57. It’s STILL positive! So without a downtrend in place (with a CCI reading below –100), I still need to be careful. If I step back and look at what happened yesterday, all I really see is an oversold market. And and as you learned in Class, oversold markets without a trend in place, tend to bounce. In other words, be patient. I still do not believe the time has come to start getting aggressive.
Also, If the Dow does firm today, there is a good possibility that it will make another run up to above 18,350. So If you still have not put on a few ‘trial’ positions with the inverse ETFs, you might want to think about my primary strategy for trading ETFs.
This strategy says that once The Tide turns (in this case negative), I start looking for inverse ETFs to trade from the Dean’s List. Right now, all four of the inverse index ETFs are on the List. Last week, only TWM was on the List. Now, DXD, QID, and SDS have joined the party. Take a look…the List has become very short now.
Also, you might note that TBT is still on the List, even after it got hit hard in yesterday’s decline. Last week, I talked about managing money in TBT after it popped above the 200 hitting a high of 50.22. Yesterday TBT closed at 46.69, proving once again that stocks go to targets and NOT to the moon. So If you’re still holding your half position in TBT, that’s OK. It’s still on the Dean’s List, but like I showed you in the WSR, don’t expect it to stay there for long. The long term trend in Bonds is still up….despite all the talk of rising interest rates.
Take a look at what happened yesterday with TMF. It jumped 3.68 points. So as the Dow declined, money poured out of equities and into TMF and TLT. Yesterday’s action was a sneak preview of things to come. So If the Dow steadies today and starts to recover, look for TBT to rise and TMF to fall. As long as TBT remains on the Dean’s List, I’m not looking to buy the positive Bond ETFs. If the Dow gets back above 18,250, I’ll start looking to establish a ‘trial’ position in TMF. Then once TBT falls off the List and TMF appears, I will become aggressive with my Bond buying.
BTW, (and please do not hold me to the numbers) after I talked about my Bond Trading Strategy in my WSR, I went back and calculated the returns for 2014 and 2015 as of last Friday. Again, all this strategy involves is being long or short bonds. When TMF or TLT is on the List, I buy one of the positive bond ETFs and hold it until it falls off the List . Then when TBT appears, I sell the positive bond ETFs and buy TBT. That’s it. No indicators, no patterns, no nothing.
For 2014, there were 6 switches between TMF and TBT. The return before commissions was 60 percent.
For 2015, I used TLT as the positive bond ETF instead of TMF. As of last Friday, there were three switches. You would have been in TLT at the start of the year, then switched into TBT at the open on 7 February. Holding TLT would have produced a return of 3 percent for a little over a month. The switch into TBT was held until 17 March, producing a return of 4 percent at which point TLT was sold and TBT purchased. As of last Friday, TBT was up 11 percent, giving this purely mechanical model an 18 percent return so far this year. Annualized, this return is 48.27 percent.
Now, I need to say that past performance of the model is NOT indicative of future results. And any investment in a stock or ETF is always risky and may not be suitable for your particular situation. All I’m doing by presenting these results is showing you want the model did in the past. It is NO guarantee of what might happen in the future.
However, IF TBT falls off the Dean’s List and TMF appears, you don’t have to ask me what I’m doing with that portion of my IRA funds that I have allocated for bonds. I will simply follow my ‘Sticks in the Sand’.
That’s what I’m doing,
h
Market Signals for 05-27-2015 |
|
---|---|
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
SUM IND | NEG |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments