Weekend Strategy Review February 2, 2014
Posted by OMS at February 2nd, 2014
Most of you know that I like to take some time at this time of the year to develop a few longer-term scenarios based on chart patterns. And while these scenarios might not be something I will be using during the next few weeks, what I’m looking for is a scenario that could develop into a larger trend for the next year.
Two quick examples come to mind: The first is gold which is currently in an intermediate term down trend with its 50 below the 200. For the past two weeks, gold and silver stocks have been dominating the Dean’s List as they moved off a TLB pattern. Some of my students have started to ‘trade’ gold stocks like RGLD when its PT indicators turned Green on 2 January at 49.04. They now have a nice profit at 55.94. During the ‘trade’, Royal ‘Jumped the Ropes’, while most other gold stocks did not, so the question for now is whether the turn in Royal is real. Will gold start to trend higher after Royal forms its Blade, or will it pull back if gold falls to the 1150 level or below before starting its Wave 5 up?
Same for Bonds. TMF, the 20+ year Treasury Bond ETF turned Green on 10 January at the 46.85 level after developing a nice TLB Pattern. During the past few weeks, the ETF, along with TLT, has been near the top of the Dean’s List and recently ‘Jumped the Ropes’. TMF is currently trading at 52.09. So now the question with TMF is what will it do from here? Will the ETF continue to trade above its moving averages, enabling the 50 to cross above the 200 to start its Major Uptrend, or will the pullback stay below the moving averages allowing Bonds to make one more leg lower?
In other words, the markets could be in transition. All of the equity markets appear to be topping. But most times this topping process takes some time to develop. And it will be very easy for the equity markets to make one more push higher to the levels I mentioned on Friday (Dow 16,100-16,200; SPX 1820-1830) before starting their next major move.
After listening to some of the speakers at the Money Show, all I can tell you is that they are divided into two camps. The traditional Bulls like Lou N. are still touting their EXTREMELY positive view, which has worked well for the past 4 years. They cite things like the Fed keeping interest rates low, which has resulted in a low dollar, producing a positive climate for stocks. All of the Bulls base their projections on things that happened in the past. Same for the Bears, only here they are talking about how things are beginning to change now that the Fed has started its tapering program. The Bears have been hammered for the past 4 years. but they continue to say the sky will fall once the easy money from the Fed stops. Nobody gives you a time period for their ‘opinions’ or their forecasts. So the question is who will be right?
All of these projections and forecasts can’t be right. And because most of them are based on speculation or what worked in the past, they’re not good enough for me. And they shouldn’t be good enough for you. I want you to have a few scenarios based on chart patterns, not opinions, so you can use the tools you learned in The Professor’s Methodology to confirm that what might occur is actually happening.
For instance, with the gold chart that I talked about above, the pattern suggests that after a pullback to the 1150 level, gold could begin a mullti-year rally. The current pattern suggests that gold (the metal) is nearing completion of a Major Wave 4 triangle pattern. And once this pattern completes, gold and the other the metals could rise significantly as Major Wave 5 starts to unfold. We have an Elliott Wave scenario supported by a longer-term chart pattern. It’s not just someone’s opinion. There are NO guarantees with this scenario, but if gold starts to look like a duck, quack like a duck, and waddle like a duck, chances are that it’s a duck. Right now, it’s still too early to tell with gold. But we’re starting to see several signs that something could be happening in the precious metal markets. We have a scenario that tells us to be on the lookout for a Major rise in gold prices. And because of this, we’re watching gold stocks like Royal, which turned positive after a TLB pattern and a ‘Rope Jump’. This is the first sign that a possible wave 1 ‘trade’ of Major Wave 5 could be underway. Now we can watch to see if the wave 2 pullback occurs and if this pullback can move the 50 above the 200. If this happens, we can then start to trade gold with more confidence, knowing that the new Uptrend is likely part of a much bigger move.
But what about the other markets? Markets like the U.S Dollar or the Euro, Europe, Asia or the Emerging Markets. How ‘bout oil? March is only one month away and I usually like to trade energy during March and April. It would be nice to know what the longer term chart of crude is telling us, so in the event that we start to see energy take off as we move into March, we’ll know if the move is only a short term pop, or if it’s part of a much larger pattern.
Anyhow, this is the kind of stuff that I believe we should be focusing on during the next few weeks.
I didn’t get any of this from the Money Show. All I got was a bunch of opinions and trust me’s. I don’t do opinions. I want to give you a few scenarios supported by chart patterns, so IF the scenarios start to unfold, you can decide for yourself which ones are likely ducks or dogs.
You will be able to use the tools in The Professor’s Methodology to verify the moves. For example, you might have a scenario with a chart pattern that says crude could be going to 150-160. Then IF you start to see several energy ETFs appear on the Dean’s List, with a pattern, and positive PT indicators, you’ll know what to do. You will be able to determine by yourself when to Buy the energy stocks, where the likely targets are and when to sell. You won’t have to rely on the opinions of the Lou’s of the world.
The U.S. equity markets appear to be in transition. It will likely take a few weeks before this transition is complete and the next Major move becomes clear. During times like this, I like to plan. So that’s what I’ll be doing this weekend. Planning. And because there was a lot of discussion about income producing products at the Money Show, I’m going to start with some of them, like Bonds and the REITS. I also want to talk about energy. If you have a particular market that you want me to look at in the days ahead, just let me know via email. If there’s enough interest, I’ll spend some time focusing on it so it can be used as part of our learning process.
If we assume that the Major Bull Market that started in March 2009 topped on 31 December 2013 at 16,588, then we must also assume that all of the decline that has occurred since the top is part of a new wave 1 down. And given that the top was part of an Ending Diagonal Pattern, with a negative Dean’s List and negative PT indicators staring us in the face, I have to assume that during the next few months, money will to start flowing out of equities and into other investment vehicles.
Many of these less popular investment vehicles have declined significantly as equities rallied and have now formed TLB patterns.
Market tops usually take several months to develop. And I expect that this one will be no different. The decline usually starts from an Ending Diagonal pattern characteristic of a wave 5. This initial decline, wave 1 down, is where most investors still do not believe that a top is in. But when they start to see that the decline is more than a normal correction, they hold off on new purchases. I believe this is what’s happening now and could contribute to additional weakness.
Then once first leg of the decline completes, traders start to enter the market again believing that they are buy another dip, a strategy that has been a consistent winner for the past 4 years. Only this time the ensuing rally will not be enough to push the markets to new highs.
And once traders start to see that the new rally does not reach the old highs, they become worried and start to sell aggressively. This aggressive selling is what produces the next Major Wave down, which is the impulse wave or wave 3 down. This is the wave where nobody will be buying the dips anymore. And without any significant buying pressure, panic selling will begin to drive markets still lower. This pattern is nothing new. It’s how markets turn.
All of this trading action takes place over several months and produces a very distinct THT reversal pattern.
Anyhow, today instead of focusing on the THT patterns of the Dow, SPX and NASDAQ, I want to focus on the inverse pattern so you’ll know what I’m looking for in the weeks ahead. As the major indexes start to decline, stocks and ETF with this inverse Three Lows to a Bottom (TLB) pattern should start to rise. ETFs with this pattern is where I will want to be in the months ahead..
The reason I’m focusing mainly on the inverse patterns today and inverse ETFs is because many of you have IRA’s and you can’t short stocks and most ETFs in an IRA. But you can buy and hold inverse ETFs in these accounts.
So let’s discuss the pattern before we do anything else. This way, you will be able to use it as a road map. The pattern is something I discuss in my PT Class. Study it carefully. Understand it thoroughly. It will be our guiding light for all of the sector scenarios in the months ahead.
Not all stocks and ETFs will follow this pattern exactly. There will be variations as some ETFs will be moving faster in time than others. But in general, all of the ETFs that I will be trading during the next few months will have characteristics similar to this pattern.
Also, if you notice, I’m talking mostly about being long the inverse ETFs, and not shorting specific stocks. This is because shorting individual stocks will become more risky as the market declines as I expect. Some of the more attractive stocks will be taken over or bought out as their price declines, so it will be more important to be right about a specific group or sector than a specific stock. This is a time when you want to be part of the herd and not standing all alone as an individual stock, vulnerable to an attack.
If we look at the attached chart, we can see that the pattern starts by turning positive after forming Three Lows to a Bottom (TLB). Then once we see three distinct lows, we MUST be on the lookout for any positive change in the PT indicators.
Once the indicators turn positive (Green) I usually buy the ETF as a ‘trade’ only. This is what some of my students are doing now with a few gold stocks. The key here is to recognize that the initial purchase after a TLB is only a ‘trade’. And when we’re ‘trading’ any stock or ETF, we’re only Buying half positions. This is because we still don’t know if the Turn Around is real. If at anytime during the ‘trade’ the PT indicators start to turn negative, I exit the trade. Remember, at this point in the ‘trade’, the 50 is still below the 200, so the ETF is still in a downtrend. I NEVER hold an ETF that has negative PT indicators in a downtrend. NEVER!
OK, but let’s assume that our ETF starts to gain momentum and after a few weeks, makes a ‘Rope Jump’ by moving above the 50 and 200 day moving averages. If this happens, then there is a good possibility that the move off the bottom is wave 1 up of a much larger move.
As long as the PT indicators remain positive, I continue to hold the ETF. If it remains above the moving averages, it will start to pull the 50 above the 200 and eventually put the ETF into an Uptrend. This sideways trading action is what forms the Blade of our Hockey Stick Pattern. It enables us to determine our initial targets. If the PT indicators turn RED before the 50 crosses above the 200, I simply sell my shares and wait for them to turn positive again.
If the indicators turn positive, I re-enter the ‘trade’ with my same ½ position. I only buy my full Basic Position when the ETF moves into an Up trend with the 50 above the 200. That’s it. From this point on, the ‘trading portion’ of the Turn has been completed and I now use Rifle Trades to Buy and Sell additional shares of the ETF as the price moves higher.
So now that you know understand the pattern that I will be using in the week ahead, let’s take a quick look at Bonds.
Specifically, I want to look at TMF, the 20 year+ Bond ETF. Right now, TMF is near the top of the Dean’s List, so it satisfies the first requirement of the SIGN. The SIGN says that for me to buy a stock or ETF, it MUST be on one of my Lists. Then it must also have a pattern and positive PT indicators. TMF satisfies all of these requirements.
If you look at the attached chart of TMF, you can see that it started to move off its bottom in late December and recently performed a ‘Rope Jump’. So now we need to watch it carefully to see IF it pulls back to form its wave 2 ‘Blade’. Right now, the 50 is still significantly below the 200, so by definition TMF is still in a downtrend. We do not buy a full Basic Positions on any stock or ETF that is still in a downtrend. If you bought a ½ position in TMF when the PT indicators turned positive on 10 January, it’s still only a ‘trade’. As long as the PT indicators remain positive, I continue to hold the stock. If the indicators turn negative, I dump it.
OK, are you with me so far?
Again, now that TMF has ‘Jumped the Ropes, I simply wait for the wave ‘2’ Blade to develop. Nothing fancy here…I just wait. I’m just holding my 1/2 position. As long as the ETF continues to trade sideways to slightly down, every day that goes by will help lift the 50 up toward the 200. If the PT indicators remain positive and the 50 crosses the 200, I buy another ½ position to establish my full Basic Position. That’s it. From this point on I Rifle Trades to add additional shares, keeping my Basic Position as long as the PT indicators remain positive,
I hope that this discussion was helpful so we can now start to examine additional sectors and markets in the days ahead.
But for now, at least you know what I’m doing with Bonds.
Early this week, the Dow and SPX could continue to decline toward the 15,600 area. If it does, TMF should continue to rally. But at some point, the Dow should complete its wave 1 down and start an a-b-c rally back up to the 16,100-16,200 level. During this rally, which could last several weeks, TMF will likely pull back to form its wave 2 ‘Blade’. This is where I will be watching the ETF very closely, especially IF the 50 starts to cross the 200. .
Several weeks ago, I talked about the possibility of a severe deflationary cycle starting in the U.S. If this starts to happen, Bonds could rally from current levels near 127 to over 150, possibly higher. At the Money Show, the equity Bulls were all talking about higher interest rates. But clearly, if the attached chart for TMF is correct, then interest rates are headed lower. And lower interest rates from current levels are not a good thing. They would simply tell me that the U.S. economy is in big trouble. So much trouble that we will need to look for other places to invest our money.
That’s why I will be looking at these other areas during the next few days. Meanwhile, study the attached charts and pattern. It might be one of the more important things you do this year.
Have a great weekend.
That’s what I’m doing,
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