Weekend Strategy Review December 27, 2013

Posted by professor  at December 27th, 2013

The Santa rally is underway.  Once the SPX broke out of its wave “d” triangle, the index had no trouble moving up.  It closed at 1842 on Friday, well on its way toward 1860.

At this point, with Bullish indicators appearing all around, it appears that one of two scenarios could be underway.

Last week, I mentioned 1860 as the target for the SPX..  I also mentioned how this target was derived and why I wanted to be somewhat conservative, even though it could push even higher.  The rationale behind my conservative approach was because there is a very high probability that the current rally is wave “e” of the Ending Diagonal Pattern, or the final wave up.

But I won’t really know until I see how the market reacts once we get closer to 1860.  Here’s the thing:  If the market starts to pause near the 1860 level, which I fully expect, it will mean that either one of two scenarios are developing.

The most Bullish of these scenarios is that the market starts to consolidate near 1860, and forms a new Blade.  The consolidation could either be sideways or slightly down, it won’t matter as long as the Dean’s List remains positive.

It should be very similar to what we saw during the final stages of the wave “d” consolidation triangle, where the worst the Dean’s List became was neutral.  If you recall, the Dean kept one positive ETF on his List while showing one negative (inverse), and dropped one ETF off the List.  So if the consolidation Blade forms near 1860 with a positive Dean’s List, it would be the most Bullish scenario.

Then once The Professor starts to wake up and highlight more than 50 stocks, we will know that the next wave up is starting.  This wave could be a good one, as it will be the middle wave of a 5-wave sequence.

Remember, wave ”e” up should consist of five waves up.  And so far since the breakout from the wave “d” triangle, the Santa rally has not paused. So it’s highly likely that it’s only the first wave in the sequence.  If this is the case, it’s also likely that the wave “e” rally could last well into 2014 before it starts to get into trouble.

A few months ago, I mentioned that the final “e” wave rally should take the Dow to just under 17,000.  I’ll stick with this number for now, but in all likelihood, IF this Bullish scenario starts to unfold, the Dow and the other market indexes could trade even higher.

But we won’t know for sure until we see how the Blade develops around the 1860 level.  That’s why I’m still a bit cautious.  I want to see a Blade.

The second scenario is still Bullish, but less so.  It still calls for the SPX to move toward the 1860 or slightly higher.  But this is where things will start to get interesting.  I previously mentioned that the “e” wave in an Ending Diagonal Pattern has a nasty habit of truncating.  And when it does, instead of forming a sideways to slightly down Blade for the second wave, prices will start to fall more than in the first Bullish scenario.  If this happens, then the rally that follows will start to run out of gas.  It won’t get as high as the first wave up which would tell us that the Ending Diagonal has completed, and it is time to batten down the hatches.  A storm is coming.

We should have plenty of warning about this.  The first thing we should see is the volume indicators starting to wane.  Right now, the volume on the DIA and SPY are very healthy.  The P-volume on the NASDSQ (QQQ) is less so.  This is likely because Apple (APPL) is still having a tough time of it.  APPL was down 3.67 points on Friday, which was very surprising given that the Dow was up 122 points.  APPL is still having a problem moving past its target of 575.  And unless it does, the Pattern that has formed since the beginning of July could a BIG negative Blade.  We’ll have to watch APPL now.  If the PT indicators start to turn negative, it would not be good for the stock.

The second thing that should give us a heads up that a storm is coming is the Dean’s List.  Mr. Reliable has always warned us before that the market is weakening.  I fully expect that he will do it again. 

The third indication should come from The Professor when he starts to highlight a bunch of shorts.  If we start to see more than 25- 30 stocks being highlighted as shorts, I will start to trade the downside. 

But not right now.  As of the moment the markets are looking very positive.  The only concern I have is that when the current rally started, The Professor only highlighted 98 stocks over a two-day period.  And while 98 are still a lot of stocks for him to highlight, it’s not the same kind of number I saw at the beginning of previous rallies.  BTW, if the first scenario does unfold after the wave ‘b’ consolidation, it will be very interesting to see how many stocks The Professor identifies to the long side.  That’s because while this rally leg should be a strong one, it will also be one of the final legs of the Ending Diagonal Pattern.

With the Dow currently up about 675 points since the rally started, it is no longer cheap.  And even though the SPX needs to rally another 18 points before it get to 1860, it’s likely that the final push higher will be a bit more difficult.

Because of this, IF I’m going to trade the final stages of the current leg up, I will focus on trending stocks from the Honor Roll.  Last week we saw Emeritus pick two home builders from the Member’s Watch List and place them on the Honor Roll.  These rallied nicely after being highlighted.  We also saw him highlight a few energy stocks that did not perform nearly as well.  Total SA (TOT) moved slightly higher, but Gulfport Energy, GPOR, just rested slightly above its 50-day ma. The stock remains in the trend mode with tight Bands.  If it starts to move higher early next week, it will definitely get my attention.

Emeritus highlighted Johnson Controls (JCI) this weekend.  If you get a chance, you might want to check out its pattern and the tight Bands.  If JCI starts to move above its recent high of 51.50, things could get very interesting.

Like I said, at this point, I don’t want to own a lot of stocks.  Just a few with interesting patterns and tight Bollinger Bands.

Have a great weekend.

That’s what I’m doing,

h

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