Weekend Strategy Review February 28, 2015

Posted by OMS  at February 28th, 2015

The Dow fell 82 points on Friday,  closing on its intraday low of 18,133.  The decline was likely the Big Move from Wednesday’s small change in the A-D oscillator.  There were 123 new highs and 30 new lows.

Yesterday’s decline appeared to be a continuation of the small wave 4 correction that has been checking the market’s advance for the past few days.  I had been expecting the decline would take the Dow to the 18,100 level, so Friday’s decline was just 33 points shy of that mark.

Like I said earlier, I did not expect much of a correction during this wave, mostly because the end-of-month time period is usually characterized by a very strong Bullish seasonality factors. 

So where are we and what will likely happen next?  Hmmm?

Well because it’s very likely that Friday’s correction was a wave 4, which may or may not be complete, I have to assume that wave 5 up, the final wave of Wave ‘e’ up will start sometime next week.  This wave should take the Dow up to the 18,300 level, possibly as high as 18,500.   These levels are targets suggested by the pattern.  They do not have to be achieved, however the odds strongly favor the Dow hitting 18,300 as a minimum.

So should students become aggressive here?  Absolutely NO!  Remember, the Major pattern is still an Ending Diagonal, and we know that this pattern has a history of truncating.  The Dow does NOT have to rally above 18,300.  It could have topped last Wednesday at 18,244. 

Also, the Tide has turned YELLOW.  Two of the four breadth indicators that make up the Tide have turned negative.  Because the pullback that occurred on Thursday and Friday was likely a small wave 4,  I’m not too concerned that two of the indicators have turned negative.  This is what I would expect to happen during a small wave 4 correction within the 5^th wave of a 5 wave sequence.  However IF all four of the breadth indicators turn negative next week, I will become very concerned.

But this is from an overall market perspective.  In all likelihood, you are NOT trading the overall market.  It’s more likely that you are trading a few individual stocks.  And some of these may have already started to roll over.  Especially if you own stocks with a lot of international exposure.  Stocks like Microsoft (MSFT), Caterpillar (CAT), Phillip Morris (PM), and IBM.  Most of these stocks are already in downtrends. They are getting hammered by the strong dollar, which is likely to get even stronger in the next 1-2 months.  So even IF the Dow rallies to the 18,300+ level, it’s likely that these international stocks will NOT recover to their old highs.

IF you own a few of these ‘internationals’ and the Dow does rally during the next few weeks, you need to think how you’re going to manage your money with these type of stocks.  Be honest with yourself.  If stocks like the ones I mentioned above couldn’t rally in the current market, what are they likely going to do IF the wheels start coming off? 

Anyhow, two of the things that tell me that the dollar is headed higher are EUO and UUP.  On Thursday, we saw Emeritus put EUO, the inverse Euro ETF on the Honor Roll.  Then last night, he highlighted UUP, the long Dollar ETF.  From past history, we know that these ETFs have a very strong inverse correlation.  When the Dollar goes up, the euro tends to fall.  So when both of these ETFs (UUP and EUO) are on the Dean’s List, the odds favor a higher dollar and a lower Euro.  And when Emeritus highlights both ETFs, the odds also favor that the Dollar and the Euro will start to trend.

This is one of the reasons that I bought a few shares of EUO on Friday.  It’s also the reason why I am very negative on any U.S. stock with significant international exposure.  So if you still own a few of these stocks, think about what I’m saying in this WSR. 

I also bought a few shares of Royal Gold (RGLD) on Friday when the PT indicators turned Green intraday on the Daily’s.  With Green indicators, a nice HS Pattern and tight Bands, it was enough for me to give it a shot.

I have been also saying that I need to be very selective now with my purchases.  I need to have a compelling reason.  Last week, I bought a few shares of C&J Energy Services (CJES) because it was highlighted by Emeritus.  The fact that it had potential to enter the trend mode was the compelling reason.  On Friday, with the Dow down 82 points, CJES was up 0.38. 

The rest of my energy stocks are just biding their time, continuing to form ‘Blades’.  Monday is the first trading day in March.  And as past history shows, the March-April time period is usually a very Bullish period to trade energy.  How Bullish?  VERY Bullish.  Since 1989, the average 3-month return (Feb-Apr) of an energy ETF like Fidelity’s Select Energy ETF, FXENX, has been 8.24%.  Last year the gain was over 14%.  During that 25 year period, there have only been four years losing years.  Four out of 25!  And the loss during 3 of the 4 losing years was less than 2 percent.  That’s impressive!  And while there are NEVER any guarantees that energy will continue to show impressive results during February-April time period, the results from past history make  a very strong, compelling argument.

That’s why I’m buying and holding a lot of energy stocks and ETFs now.

Have a great weekend.

That’s what I’m doing,

h

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