Professor’s Comments May 30, 2014

Posted by OMS  at May 30th, 2014

The Dow rose 65 points, closing at 16,699. Volume was light on the rally, coming in at 93 percent of its 10 day average.  There were 192 new highs and only 17 new lows.

It appears that market is nearing completion of wave 3 up.  The reason I feel this way is because of the pattern and the total lack of P-volume on the rally.  This rally is running out of gas fast! 

I previously felt that the Dow should reach 17,000 on this leg up.  Now, because of the extremely low P-volume, I’m going to have to lower that target a bit.  Maybe 16,800-16,900 on the Dow, and 1940 on the SPX.

I’m still riding the train, but I‘m starting to manage my money more aggressively.  When I sell something now, I’m not replacing it.

The Dean’s List is very long and strong at the moment, and all of the PT indicators are positive.  I some have nice gains in most of the stocks I have been talking about for weeks,  But I’m starting to see signs that things could be ready to change.

What signs?  Hmmm?

Well, for starters, there’s the VIX.  On Wednesday, the VIX generated a Sell Signal by closing back above its lower Bollinger Band.  When the current rally started, it was triggered by a VIX Buy Signal on 14 April.  As you know, VIX Buy Signals are usually a few days early.  Same for VIX Sell Signals. And now, even though the market is rallying, helped by strong end-of month institutional buying, we have a VIX Sell Signal on the Board.

After today, the end-of month institutional buying will start ebb, and next week, traders will start to focus on the May Jobs Report.  And given the low P-volume we’ve been seeing, there is a strong possibility that a poor Jobs Report could trigger the wave 4 sell off that I expect.

Because of this, I’m starting to manage money and lighten up. After yesterday’s rally, I’m only about 60 percent invested. My shares of Striker (SYK) popped over 2 points on Wednesday, and then tacked on another point yesterday.  SYK closed above its very wide Bollinger Band yesterday, and appears extremely overbought at this point.  It was a prime candidate for money management.

Here’s the thing:  I really like Striker.  As I mentioned several weeks ago, it had one of the strongest P-volumes of any stock I follow.  The P-volume continues to remain strong, but I also know what usually happens to stocks that trade above their Upper Bollinger Band.  They usually don’t stay there very long.  They usually retrace.

There are many stocks out there now with patterns that look very similar to SYK.  And if SYK starts to fall back below its Upper Band,  odds are that all of the stocks with patterns similar to SYK will also start to correct.  And with a VIX Sell Signal on the board, that correction could start to get ugly. How ugly?  Maybe down to 16,200 or below on the Dow or 500-600 points from current levels.

Do here’s the deal:  At this point, the charts are now suggesting the Dow will top (on this leg) under 17,000.  So I’m looking at a potential upside of about 100-200 points and a downside of 500-600 points.  I don’t like the odds.

That’s why I’m starting to lighten up.

It’s what I’m doing,

h

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