Weekend Strategy Review 12-21-2013

Posted by professor  at December 21st, 2013

The Dow rose 42 points on Friday, closing the week at 16,221. The SPX broke out of its wave “d” triangle on Friday, moving above the recent 1813 high to close the week at 1818.  In doing so, the SPX triggered a Buy Signal.

When the SPX started to break out on Friday morning, I ran the Professor algorithm to see if he was confirming the breakout.  He was with 89 stocks entering a trend.  However when the market started to pull back at the end of the day, it appears The Professor changed his mind.  He was only showing 49 longs.  Hmmm?

If you recall, The Professor also had 49 longs on Thursday, just one short of the 50 longs required to confirm an Uptrend.  On the other hand, while The Professor did not highlight the required 50 on Friday, he is telling us that 98 stocks are entering the trend mode. That”s still a lot of stocks, so something is going on.

Taken together with positive DMIs on the Dow (DIA) and SPX, and a positive Dean’s List, and what appears to be a  wave 4 triangle pattern on SPX,  the data leads me to conclude that the final wave of the Ending Diagonal Pattern, or wave “e” up is starting.

The only fly in the ointment is the fact that the DMI on the NASDAQ 100, (QQQ) is still negative.  The other Red Flag I see in the Wave “e” scenario is the fact that the weekly chart for the Dow is now starting to warn.  That’s because the Dow  reached both a 21 day high and a new six-month high that is not confirmed by an equivalent high in On Balance Volume. This negative divergent is a warning that prices could start to reverse and start a downward movement.

Here’s the thing:  Most of the time, all of the indicators are giving us clear signals.  Like in early October.  Trading was easy then.  I went all in when the DIA, QQQ, and SPX were giving clear Buy Signals that were confirmed by The Professor.  If I recall the number of longs he identified, it was something like 198.  But now, things are not so clear.  The Dow and NASDAQ are providing mixed signals.  And The Professor is still on the fence.

AAPL has pulled back from its high of 575 to 549 like we figured it would.  The stock appears to be forming a ‘Blade” for another move higher.  However, it’s PT indicators are still mixed..  Back in early October, when I started talking about AAPL,  I mentioned that if the stock entered an Uptrend, it would likely take the NASDAQ higher.  And that’s what happened.  But if you look closely at Apple’s chart, you can clearly see that the rise off the Hockey Stick pattern in mid-September has been in five waves.  FIVE WAVES.  Hmmm?  Five waves that drove the price to its target of 575.  Another major HMMM?

This worries me.  When I see 5 waves to the Upside, especially when these waves are part of the continuation leg of a Hockey Stick Pattern, I have to be concerned.  It could be telling me the move is over.  And without AAPL moving higher, I have a hard time seeing how the Nasdaq (QQQ) is going to move higher.  Something else that scares me is the P-volume on the Nasdaq.  If you get a chance during the weekend, take a quick look at the P-volume on the QQQ all by itself.  That negative divergence is one of the worst divergences I’ve seen from any stock in years.  It tells me that the NASDAQ is running out of gas.  Yeah, our car can continue to roll along, but we’re going to have to find a gas station pretty soon.

So what to do?  Hmmm?  With mixed signals on the Board, I’m still going to approach this market with caution.  The positive bias from the Holiday Season and bullish end of month re-balancing, should provide the markets with a positive bias.  But once we get past the end of the year, a few storm clouds could start to move in.  I don’t think we’re going to see another government shut-down, but the debate on the debt ceiling could be testy. 

Anyhow, in the Professor’s Methodology, we don’t deal with things that might happen. We trade what the patterns and indicators tell us. And right now, we have positive signals from the Dow and SPX, but a Nasdaq that is still dragging its heals.  But if you look at all three indexes, they all have one thing in common.  They are all in Uptrends.

And when markets are in Uptrends, we use Rifle Trades to add shares to our Basic Positions.

Yesterday I received an email from Gerald B. asking me to review a few things.  Gerald was confused as to when I consider a stock a Trade Only and when I establish Basic Positions.  No problem.. I’m always happy to answer questions like this on The Professor’s Methodology.  What I do not like is when a student sends me an email asking what a short is, or what do I mean by M2.  When I get questions like the latter, I always give my students a homework assignment, telling them top learn how to use Google, and then send me what they found.  So unless you want a homework assignment, don’t send me these kind of questions.  I usually get over 100 email questions a week, so you have to help me out here.  I can’t answer everybody and do a good job on my analysis. 

Anyhow, to answer Gerald, here’s how it works.

The Methodology always starts with a turn around.  So let’s assume that our stock was in a down trend, with a negative DMI.  For the purpose of this discussion, I’m only going to talk about the DMI, but you should understand that I’m really talking about the PT indicators.

So, once I see a stock in a downtrend, I start to look for a Three Lows to a Bottom (TLB) Pattern.  Then I trade the stock when the DMI (PT Indicators) turn positive.  This is the TRADE.  It’s always a trade because the stock is still in a downtrend.  I never hold Basic Positions in a stock that is in a down trend. NEVER.

OK, so now I’m in the TRADE.  I always exit the TRADE if the indicators turn against me.  ALWAYS!   However IF the stock starts to move up and Jumps the Ropes, I continue to hold the TRADE until the indicators turn against me.  If they don’t, I continue to hold the stock.

OK, so now I’m holding a stock that is still in a downtrend with positive indicators.  It’s still a TRADE and I’m only holding a half position.  TRADES are ALWAYS half positions.  So if I plan to establish a basic position of 1,000 shares of a stock, my TRADE is for 500 shares.

The next thing I look for after a Rope Jump is a pullback.  There is always a pullback.  Remember, the Rope Jump identifies the initial move as a Wave 1.   So for the stock to move higher, it must pullback in a wave 2 to form the Blade of our Hockey Stick pattern.  The consolidation that takes place during the formation of the Blade is what gives the stock the energy to move higher in wave 3, the continuation or impulse wave.

Are you with me so far?  Good.  If not, go back and re-read what I said about the TRADING Portion of the Methodology.  At this point, I’m not in love.  I’m only dating the stock by holding a half position.

And while I’m holding he stock, I’m watching what it’s doing.  If at any time during the turning process, the indicators turn negative, I sell the stock. 

However, IF the stock is actually in the process of turning around, the Blade will form either above or close to the 200 period moving average.  In doing so, it will start to pull the 50 above the 200.  Once this happens, the stock will be in an Uptrend and I can add to my original shares.  So I buy another 500 shares on the ma cross and this now becomes my Basic Position.  In this case if I still have my original 500 share TRADE lot, they are added to the 500 shares I bought on the ma cross, and this now becomes my Basic Position.

If I sold my 500 share TRADE position, and then the stock starts to move higher after the Blade forms and a DMI turn, I buy 1,000 shares to establish my Basic Position.  Now that the moving averages have crossed, I can buy the stock in an Uptrend.

OK…still with me.  If not, go back and review.

So now the “Trading the Turn” Portion of the Methodology is complete.  I own a Basic Position of 1,000 shares of a stock in an Uptrend.  If you’re still note sure about how I trade and want additional details, you might want to purchase the webinar I did for AIQ System a few months back.  Just go to www.aiqsyatems.com. It costs $99 bucks.  It’s a lot cheaper to re-read what I say here and save yourself the money.

From here on, I’m now interested in adding additional shares to my stock.  This is where I use Rifle Trades. 

With Rifle Trades, I look for times when the 2-period RSI Wilder becomes oversold (less than 30).  When I see an oversold RSI, with my stock in and Uptrend with positive indicators, I get out my Rifle and go hunting on the 60s.  The 2-period RSI tells me when it’s a good time to go hunting.  The weather is clear and I know that there will be many ducks on the pond.  The oversold 2-period RSI tells me this.

So I take out my Rifle, which is the 60 minute chart, and blast away when the indicators turn positive.  When I Rifle Trade, I always buy a half position. or in this example, 500 shares.  Remember, Rifle Trades are only TRADES as the name implies.  While I’m now in love with my Basic Position, the 500 additional shares are only a TRADE.  I dump them when the 60’s give say so.

These two positions are managed separately.  The Basic Position was established on the Daily Chart, so it is managed on the Daily Chart.  The Rifle Trade was purchased using the 60s, so it is managed on the 60s.   I never mix the trades.

I can usually get 3 or 4 Rifle Trades in a stock before a THT Pattern starts to form.  Once I see a THT Pattern, I become cautious and then watch for a DMI turn on the Daily Chart.  If this happens I’m out of the stock.

I know this post is getting long, but I do want to give you an example before I close. 

So let’s look at Marathon Pete, MPC, a stock I talked about a few weeks ago when it was making its turn.

Marathon has been on a Buy Signal since its PT indicators turned positive on 16 October. The stock performed a Rope Jump on 18 October, and then traded sideways to form its Blade.  The 50 crossed above the 200 on 14 November putting the stock in an Uptrend.  That’s where I established a Basic Position.  The stock remains in an Uptrend so I can now use…Rifle Trades to add shares.

The last opportunity for a Rifle Trade on MPC was on 13 December when the 2-period RSI dropped below the 30 level.  Again, with Rifle Trades, I look to buy another half position when the 2-period RSI on the Daily Chart is oversold. I get out my Rifle (the 60 min chart) and blast away when the indicators give say so.  I do this while maintaining my Basic Position as long as the PT indicators remain positive.

BTW, the ‘Blade’ that has formed on MPC during the past month appears to be a wave 4.  If I’m correct about this, we should see one more push higher during the next few weeks.  Just pay attention the indicators.

So that’s the Big Picture Strategy for this week.  Because it’s likely that wave “e” up is starting, with most stocks in Uptrends, I will be looking for Rifle Trades.  It’s just safer to buy a stock when it has pulled back with an over sold 2-period RSI Wilder.  As the stock is still in an Uptrend, I know I’m buying it On Sale.

Gerald, I hope this answers your question, and helps others as well.  I love questions like this on the Methodology.  On the other hand, I hate it when someone asks for my opinion on a stock or asks me something that can be Googled.  If you ask for my opinion on a stock, I won’t answer.  If you ask me something that can be Googled, you’ll get a homework assignment.  That’s the rules.

Have a great weekend.

That’s what I’m doing.

h

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.