Professor’s Comments October 4, 2013

Posted by OMS  at October 4th, 2013

The Dow fell 133 points, closing at 14,997. Volume on the NYSE was moderate, coming in at 101 percent of its 10 day average.  There were 101 new highs and 43 new lows.  Notice that the number of new highs is still significantly above the number of new lows.  So the internals remain strong.

The SPX traded as low as 1670 yesterday, falling from the small bearish Blade I mentioned yesterday.  For the past several days, I have been saying that the S&P could test the 1660-1665 level.   So yesterday it got within 5 points of my upper target.

There is still a chance that the SPX could trade down to the 1660 level during the next few days, but I am starting to see signs of a bottom.

Ok, what sign?  Hmmm?  Well the VIX finally closed above its Upper Bollinger Band.  By doing so it generated a Set-up for a VIX Buy Signal.  So now if the market trades sideways or up during the next day or so, it is likely that the VIX will fall back below its Upper Band, generating a VIX Buy Signal.  But as we know from previous VIX Buy Signals, they are usually early.  However they are almost always the first sign in a turn.

At this time, the pattern continues to look more and more like a Wave D within an Ending Diagonal Patten.  If we do bottom near these levels, the markets should experience a significant rally once Wave E up begins

So with the VIX Buy Signal Set-up in place, we could be close to having our first sign.

Once this happens, step 2 would be for the DXD to drop off the Dean’s List and be replaced by the two positive Dow ETFs, DIA and DDM.  The QQQ and QLD are already on the List, telling me that despite the drop off in the Dow and S&P, technology and pharma remain strong.

Step 3 would be to see the PT indicators turn positive, and step 4 would be The Professor confirming the move by highlighting 50 or more stocks as entering Uptrends.

We’re still likely several days from all of the above happening, so be patient.  On the other hand, the politicians in Washington could strike a deal over the weekend, and we could be off to the races by early next week.  I believe that all we need for a rally to start is some type of compromise that would re-open the government and defer discussions on potential changes to Obamacare as part of the debate on the debt ceiling.  I don’t believe this will be that hard for both parties tp do.

BTW, this is something that will happen.  The debt ceiling will be raised.  The U.S will continue to pay its obligations. No political party as a group will vote to do otherwise.  It would be political suicide.  Wall Street will never allow Washington to do this.  So even though the government shutdown will likely continue for a few more days, something will be worked out before 17 October.  Count on it! Once this happens, the ‘cloud’ will be removed and the markets should rally to new highs.

So continue to look for stocks that have formed nice Blades during the past few weeks. Be especially mindful of stocks where the Bollinger Bands have tightened as the stock traded sideways.  A good example of what you should be looking for on a chart is what SLB did during July and August.  During July, the stock rose from 70 to 84 forming a ‘stick’.  Then in August, he stock pulled back to the 70 level as it formed its Blade.  The stock remained in an Uptrend as it pulled back, and meanwhile the Bollinger Bands tightened.  It was classic!

Right now there are several stocks on the Member’s Watch List with similar patterns.  These are the stocks that will lead the market higher on the next leg up.

I will talk about a few of these in my WSR this weekend, but for now I would like you to do some homework.  Remember, the purpose of this website is to help you learn.  You will never learn if all you do is just follow the picks of some analyst.  No, I want you to be able to do it yourself.  So this weekend, use the SIGN to identify a few stocks by yourself.

The SIGN simply says that the stock or ETF needs to be on one of the Lists.  Then it MUST have a Pattern.  (Right now we’re mostly looking for HSw/Blade Patterns.) And finally it MUST have positive PT indicators.   It’s OK if one or more of the PT indicators have turned negative during the pullback.  All this tells us is that it’s not ready to buy yet.  You need to be patient and wait.

So that’s what I’m doing today.  Waiting.

BTW, if you do your homework today and find a stock you’re interested in that is on a List and has a pattern, send it to me.  If there is significant interest in the stock, I’ll talk about it during the weekend.  Only one stock per person please.

I want you to be ready with a few stocks for the next rally leg up.  It could be a good one.

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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