Weekend Strategy Review February 9, 2014

Posted by OMS  at February 9th, 2014

Yesterday’s rally after another poor Jobs Report was like watching Pavlov’s dogs.

Ivan Pavlov was a Russian physiologist who won the 1904 Nobel Prize for his work studying the digestive processes in dogs.  He observed that his canine friends began to salivate whenever he or an assistant would enter the room.  It didn’t matter if they had food with them or not. 

Based on his observations, Pavlov suggested that the salivation was a learned response. The dogs were responding to the sight of the research assistants’ white lab coats, which the animals had come to associate with getting fed.

Yesterday we saw traders react in a similar manner.  The BLS entered the room, announced a poor jobs report, and the market rallied.  Investors have come to associate a poor jobs report with getting additional stimulus from the Fed.  Hmmm?  Earnings–the real food of positive markets….who cares?  Just give them the juice!

It didn’t matter that the Fed has begun to taper, taking the juice bowl away from the party.  Yesterday’s rally was based on the hope that they would change their minds and start stimulating again.  Crazy!

In The Professor’s Methodology, we don’t do hope.  We follow List’s, Patterns, and indicators.

Going into yesterday, the Dean’s List was negative.  It’s still negative.

Going into yesterday, the pattern suggested that the market had completed wave 1 down of a new Bear Market.  And because the previous day’s rally appeared to be the first leg up of an a-b-c retracement rally for wave 2 up, I mentioned that this wave could continue up toward the 16,000 level on the Dow.  Yesterday’s rally was good for 165 points, taking the Dow back up to 15,794.

OK, so what should we expect now? 

The market is no longer oversold.  At some point, wave ’b’ down in the a-b-c pattern should start to develop.  I would expect this wave to take the Dow back down near the 15,550 level or so before the final rally leg of the pattern, wave ‘c’ up begins.

Here’s what you need to assess.   With the Dow now only 300 points from 16,000, you should ask yourself how you’re going to trade the next legs of this market.  Will the risk-reward be worth it?

Right now, all of the Lists, Patterns and Indicators are negative.  The past two days gave us a 450-point move, back to 15,794.  And while the pattern suggests that the final moves of this wave 2 rally will likely take the Dow back above 16,000, we’re probably going to have to drop to 15,500 or below to get there.

How’s your stomach these days?  Remember, it was only 13 trading days ago when the market was making new highs.  But the technical picture has changed radically since then.  During the past week, we saw the Dow make a ‘Rope Jump’ to the downside indicating a possible wave 1 down.  The Dean’s List and all of the PT indicators have turned negative.  So unless proven otherwise, we must assume that the past two days of rally are part of the retracement waves of wave 2 up.  And as we have seen during the past few weeks, moves of several hundred points are becoming common.  You might want to think about what these moves might look like once the impulse action of a possible wave 3 down starts to hit.  It could get real ugly real fast.

So that’s what I want you to think about this weekend.  Your exit strategy.  Remember, in Class, I always talk about how it only costs 6 bucks (commission)  to sit safely on the sidelines, protected by the walls of your castle.  Then once the lions, tigers and bears …especially the BEARS, leave the valley, you can pay another 6 bucks to go back down into the valley to pick more fruit.  Right now, there a lot of hungry BEARS in the valley.  And with the Dow only 200 points from 16,000, the fruit is starting to get scarce.

I’m not saying that the market is going to crash from current levels.  I don’t believe it will.  But I also believe the market is going to experience some rough sledding in the weeks ahead as it tries to push higher.  It WILL test your stomach. You need to start asking yourself what you’re going to do.  It’s time to start developing your plan.

Next Thursday evening, I will be holding an Update Class at UNF where I will be talking about some of the places where I believe money can be put to work to take advantage of the current turmoil. I believe that the months ahead will be EXTREMELY profitable for traders, but you will have to be on the right side of the market to take advantage of the moves.

Last week, I mentioned that I was working on a few things.  I mentioned Bonds, and XIV, the inverse VIX.  I noted that the VIX has been a gook short when it was over 20.  Last week, when the VIX reached 21, I started to buy XIV, the inverse VIX at when it was close to 25.  It closed above 30 on Friday.

My point is that there will be a lot of places to make money in the months (years?) ahead as the Bear Market starts to unfold.  But the sectors that will be profitable will be a lot different than those you have been trading the past few years.  The market is in the process of changing direction, and in the weeks ahead, I’m going to give you a few ideas so you won’t get eaten up by the Bear. 

I’m not there yet.  Give me a few more days and I’ll start start sharing these ideas with you so you can consider them in your planning process.. But from the research I’ve been doing, I believe that some of the results might surprise you.

Have a great weekend,

That’s what I’m doing,

h

BTW, I never did enter the trade on DUST that I talked about on Friday.  The PT indicators on the 5s never turned positive, keeping me out of the trade.

FAQ

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.