Professor’s Comments November 14, 2013

Posted by OMS  at November 14th, 2013

The Dow rose 69 points, closing at 15,820. Volume was moderate on the rally, coming in at 96 percent of its 10 day average.  There were 167 new highs and 51 new lows.

The Dow dropped almost 80 points right out of the date and then spent the rest of the day recovering to new highs. The strong intraday move of 148 points appeared to be the Big Move predicted by the A-D oscillator.  It made for a tough trading day.

As most of you know, I went into yesterday looking for a few stocks to short.  All of my breadth indicators were negative, including the A-D oscillator.  And because breadth is usually right, I like to trade in its direction.

But it didn’t happen that way yesterday. The market opened down as expected, but because of the big early decline, it was problematic to short.

After talking about scalp trades for the past few days, I received two emails after the market opened asking about the indicators I was using.  And while no one indicator would have been any help early yesterday, there was something that was, and I talk about it all the time in Class.  It has to do with waiting for the first 15 minute bar to print before jumping in.

If you started to short the 5s early yesterday, it’s likely that you got burned.  Once the Dow dropped those 80 points, there was no follow through.  As a matter of fact, once the first 15 min bar printed on the Dow and Nasdaq, it was pretty obvious that it was not going to be a down day.  Prices took off to the upside once the high of the first 15 min bar was exceeded and never looked back.  So remember this next time you want to take an early trade.  I could save you from being caught on a reversal day like yesterday.

From a breadth perspective, nothing really changed with yesterday’s trading.  All of the breadth indicators, including the A-D oscillator remain negative. 

Yesterday’s big upside move tended to morph the triangle pattern that has been forming for the past few weeks.  At this point, it’s not exactly clear what the pattern is morphing into, but it still favors at least one more move to the downside.  The problem I’m having with the current pattern is that while I’m not sure what it’s morphing into, it does not appear to be something that will support a major rally.  

So given that the breadth indicators are still negative, I’m going to wait a few more days before I commit new money to the market.  I hate buying at new highs.  And when I see trading action like I saw yesterday, it makes me very cautious.  Besides, yesterday’s big pop was mostly driven by Macy’s, and you don’t usually see major rallies started by the retailers.

Another thing that has been concerning me lately is some of the earnings announcements.  Most of them have been very good.  But like I say in Class, it’s pretty easy for a company to make its earnings appear rosy.  All you have to do is fire a few people, make part timers out of them or just not replace inventory.  And with what’s going on with Obamacare, that’s exactly what a lot of companies are doing now.  So don’t pay too much attention to the earnings.  The most important number for a company is its revenue.  What a company actually takes in.  And right now, we’re seeing more and more companies beat earnings, but miss on revenue.

Last night after the market closed, Cisco Systems, CSCO, was the latest company to report positive earnings, but miss on revenues.  The stock dropped over 4 percent in after hours trading.  This is NOT something you want to see happening in this market if you are longer term bullish.  Revenues are the life blood of a company.  And when I see company after company reporting higher earnings, but lower revenues, I get concerned.  Pay attention to revenue, not earnings.

One more thing.  I said that yesterday’s pop was mostly driven by the retailers.  There was a lot of talk yesterday about how more and more stores will be open on Thanksgiving, and how the retailers have made a smooth transition from their brick and mortar stores and on-line shopping.  Hogwash!   What will count in the days ahead is not the extended hours, but how much money the consumer will actually spend shopping in these stores.  That has not been determined yet.

But one thing I know.  A company like Cisco actually makes things.  A company like Macy’s only sells things.  Healthy economies and healthy markets are driven by the former, not the latter.  And with so many people out of work now, it makes me wonder where all those holiday shoppers are going to get the money to spend in places like Macy’s.  It just doesn’t pass my smell test.   Again, a company like Macy’s can make their earnings look very pretty for awhile.  But at the end of the day, they will need revenue from consumers.  So from that perspective, it should be very interesting to see how the Holiday shopping season unfolds.

BTW, just about all of the refiners I have been talking about recently had a nice day yesterday.  Marathon, MPC, was up another dollar.  Same for Tesoro Pete, TSO.  China Pete, SNP, which derives its revenues from both energy and chemicals, was down on the day.  However the company remains in an Uptrend, and all yesterday did was put the 2-period RSI Wilder close to oversold territory.  Hmmm?  Rifle Trades?  MPC and TSO are still not in Uptrends, so we need to pay attention to the short term Hockey Stick Pattern that has produced  their current rallies.  When I say pay attention, I mean use the HS Pattern to determine the short term target and then look at where you should start managing your money.  Just like what we did with China Pete a few days ago.  Remember, we NEVER fall in love with stocks that are still in down trends.  We only dance with them.

Anyhow, I won’t be doing much today.  I want to see how the market resolves the mixed signals between price, pattern, and breadth.  My algorithms remain mostly silent, and when this happens, it’s usually a good time to remain on the sidelines.

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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