Weekend Strategy Review August 3, 2013

Posted by professor  at August 3rd, 2013

The Dow rose 30 points on Friday, closing at an all time high of 15,658. It was up 99 points on the week. The Nasdaq also closed at an all time high of 3689, up 13 points on Friday, and up 76 points for the week.

I found it interesting that even though the indexes were making new highs on Friday, the number of new stocks on the NYSE making new highs fell dramatically. There were only 208 new highs on Friday as compared to 403 on Thursday. Hmmm?

With Friday’s late rally, the Dow is now only 42 points away from the wave 1 target that I talked about weeks ago. And while the markets could push higher, I believe that it’s getting close to the time where we should be thinking more about managing money than initiating new positions.

So this is my Big Picture Strategy going into next week. Start protecting yourself.

When I look at risk-reward from these levels, I do not like the odds for an upside bet, but still feel it’s too early to start fading the market. Most of my volume and Money Flow indicators are showing severe negative divergence, with some even starting to turn negative. But I need to see a momentum shift and a lot more evidence of a market turn before I begin to place bets on the down side. This is a place where some tight stops might be useful.

As you know from Class, when stocks start to approach my targets, I start to move my stop up. I usually don’t use a stop, except when I start taking money off the table on my Basic Position at the halfway point. Then I place a stop at my entry point. But once a stock or an index starts to approach my target, I move the initial stop up so that is very close to the target. Remember, stocks don’t go to heaven; they go to targets.

The Dean’s List remains long and strong, and as a minimum, I would need to see it shorten up before I look at the short side. But given that we are now approaching my targets, we could see the List start to change this week.

Remember, the Dean’s List always tells me where the strength is in the markets. But I always use the List in conjunction with the other elements of the SIGN. For a stock or ETF to be a buy, it must appear on the List, have a pattern and then the PT indicators need to turn positive. The two patterns I use with the Dean’s List are the THT (or TLB) pattern and the Hockey Stick. As far as I’m concerned, these are the only two patterns that matter in trading stocks.

Stocks only do three things. They either follow trends, consolidate, or change direction. That’s it. When they change direction, they form a TLB pattern if they’re moving from a downtrend to an uptrend. Then once they start to change direction, they form a Hockey Stick (an up move followed by a consolidation period) to help them move higher. That’s it.

Take gold as an example. This week, we saw several gold stocks and ETFs move to the top of the Dean’s List. My gold rabbit, Royal Gold, RGLD, was among the leaders. For the past year, gold has been in a downtrend, as part of its extended Major Wave 4 correction. Royal has followed gold lower. But after forming a TLB Pattern in late June, the PT indicators on RGLD turned positive on 23 July at the 50 level. Royal became a Buy as a trade. It satisfied all of the elements of the SIGN. It was on the Dean’s List, had a TLB Pattern and positive PT indicators.

But we know from Class that Royal, and all of the other gold stocks still have a lot of work to do. So far, all that has happened with the ‘Buy’ on RGLD is just some preliminary action. Before I get serious about Royal, I MUST see it ‘Jump the Ropes’, which means that the price MUST move above the 50 and 200 moving averages. If it does this, then there is an excellent chance that the stock will start an Uptrend. If it does not move above the 50 and 200, there is NO possibility that an Up trend will start. None!

All Royal and the other gold stocks are doing now is giving us a ‘heads up’, that something could be happening with the miners. And by taking the Buy Signal in Royal when the indicators turned positive after a TLB pattern, all it does is keeps me interested. If the indicators turn negative, I will simply exit the trade. It will tell me that gold’s move up was a false alarm, and that gold will likely need one more leg lower. Its downtrend will likely continue. But I won’t be sticking around to see it. And that’s all you should read into Royal and all of the other gold stocks now. By appearing on the Dean’s List and satisfying all of the elements of the SIGN, it is telling me that gold is only a trade at this point. I’m not ready to fall in love or bet the farm yet. It’s way too early. But IF gold is in fact completing its Major Wave 4 down, and is about to enter its Major Wave 5 up rally wave, a wave that could take gold to the 2,200-2,500 level or higher, by taking a preliminary position in Royal when the DMI turned positive, I could be participating in the initial stages of the bottoming process.

And IF gold ‘Jumps the Ropes’, identifying the move as a wave 1, I will likely step aside after wave 1 up completes, watching for the indicators to turn negative again, as gold forms its wave 2. Blade. Then once I see the first two parts of the Hockey Stick Patten develop, telling me that Waves 1 and 2 are complete , I will know that the Pattern is ready to support the next move higher (wave 3 up). That’s when I’ll get serious about gold. Not now.

It’s really as simple as 1-2-3. Dean’s List, 2 Patterns, and 3 PT indicators for a trigger.

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

h

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.