Weekend Strategy Review April 26, 2014

Posted by OMS  at April 26th, 2014

The Dow fell 140 points on Friday, closing at 16,361.  It was down 47 points for the week.  The Dow has now traded sideways, between 16,000 and 16,600, for the past two months.  It appears that this narrow range trading is about to change.

Friday’s pullback was expected and necessary for the markets to move higher.  It was likely part or all of wave 2 down in a five-wave sequence for wave “c” up.  The markets could trade flat to lower early next week to complete wave 2 down, but any further decline from Friday’s lows should be considered a buying opportunity.

That’s what I was doing Friday when the Dow was down over 160 points:  I was buying.  Here’s the thing:  Like I always say, trading is an odds game.  You have to play when the odds are in your favor. And when Dow was down 168 points, I thought the downside risk vs. the upside reward was favorable in view of the rally I expect toward 17,000.  If I’m right about the pattern being a wave 2, wave 3 up should be starting toward the end of next week. 

I bought a few shares of DDM, the 2:1 Dow tracking ETF.  The reason I bought this leveraged index ETF was because I did not see any new sectors, besides energy emerging.  Most of the sectors I’m looking at now are starting to gain strength, but at this point there is no clear leader other than energy.

So all I did was put the money I received when I sold a few shares of HAL, SLB, GPOR and others back to work in the overall market.  Right now I’m back to about 75 percent invested, mostly in energy and DDMs.  The remaining 25 percent is in a money market, waiting for a leader to emerge.

I want to say a few things now about energy. 

If you recall, at my last Update Class and on these pages, I talked a lot about how my charts were saying that crude oil would be going a lot higher.  Back in January, when crude was trading under $100 a barrel, I mentioned that the pattern on my charts was saying crude oil could see $150-$160 in 2015. 

So now that crude is trading above $100 a barrel, all of us who have been trading energy stocks and ETFs have Big smiles on our faces.  Just imagine how we’ll feel If crude starts to trade above $110, and then $120? 

Anyhow, my message to you today is that I have not changed my opinion or my longer range target for crude.  I still believe that higher energy prices are in the cards. I just want to remind you of this.

So about now, you’re probably asking yourself why I took a few bucks off the table with all of my energy stocks last week?   Hmmm?

Well it’s because most of my energy stocks, like HAL, hit their targets.  HAL reached its target of 65 where it appeared to be overbought.  Just like GPOR did when it hit 75.  Now it’s at 71.  The short term pattern that enabled it to reach 65 has ended.  So now, for HAL and the other energy stocks to move higher, they will likely need to rest and form another Blade.  I don’t like to hold stocks when they are resting, forming Blades and not trending.  It’s too risky.  So I took some money off the table.

But in no circumstances should you interpret the pruning I did last week as being negative on energy.  I’m not!  As long as DIG and the other energy ETFs remain on the Dean’s List, I must remain positive on the sector.  If the 2-period RSI Wilder starts to become oversold on the Daily’s, I will re-enter all of my energy stocks using Rifle Trading techniques.

So right now, all I’m doing is watching and waiting for wave 2 down to complete.

Also, if you attended my Update Class in January, you heard me talk about how I believed that interest rates would remain low for the foreseeable future. I didn’t believe anything the talking heads on CNBC or FOX were saying about interest rates going higher.  And this weekend, we see that TMF, the 20+year Bond ETF, is being ranked #2 on the Dean’s List.  Hmmm?  I wonder if the talking heads will start to change their mind?  I’m not.

I still believe that the long bond will trade above 160 in 2015.  It’s currently at 134, up from the 127 level where I expected it to bottom.  About now, you’re probably thinking how can this happen.  If crude oil starts to move higher, won’t this be highly inflationary causing bond prices to tank?  Again…Hmmm?

Well, not if higher crude prices cause the overall markets to tank.  If this happens, money from equities will start pouring into the bond market.  We’re starting to see some of this now.  Only now it’s Russian money that is leaving their equity market for a safer home in American debt.  Crazy huh?  But this is exactly what happened in August 2011 during the Greek crisis.  That’s when we saw TMF go from 37 to 80 in two months!  When traders start to get nervous about the equity markets, they buy Bonds.  They can’t buy them fast enough.  And that’s why I’m still very positive on Bonds for the next 1-2 years.  A lot of people are going to get EXTREMELY nervous about equities later this year.

However, I should also say that I’m not buying a lot of TMF now.  Yeah, I see it near the top of the Dean’s List.  But right now, I’m just watching.  That’s because I see better opportunities in equities.  If the Dow starts to move toward 17,000 as I expect, traders will move money out of Bonds for the short term and into equities.  Once we get closer to 17,000, the process will likely reverse. That’s when I will start thinking more about defensive measures like TMF and TLT.

But right now, I’m looking to go on the offensive.  I’m looking to put money to work. If we trade lower early next week, I’ll continue to buy additional shares of DDM.  If a sector besides energy starts to emerge as a leader, I’ll look to buy those shares too with the 25 percent of my resources I currently have in cash.  And if energy becomes oversold,….well you know what I’m gonna do.

Have a great weekend.  That’s what I’m doing,

h

FAQ

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