Weekend Strategy Review January 26, 2014
Posted by OMS at January 26th, 2014
Is this really the beginning of the end of the world? You would have thought so by listening to the financial commentators on CNBC and Fox Business News yesterday. They were all in a state of confused panic.
That’s why I want to take some time this morning and try to put a few things into perspective.
I know…it didn’t feel good to watch your stocks go down yesterday. I tried to warn you about the possibility of this happening, saying that all of the indexes were in corrective patterns and that The Professor was not providing us with a Buy Signal to put new money to work, so we needed to be cautious.
And during the past four days, we saw what happened. The Dow dropped over 578 points.
But instead of going into a state of panic over the numbers, let’s try to put them in perspective. Maybe we can feel better after we look at the facts.
Back in early October, when wave “e” up started, I talked about how this wave was likely the final wave up in an Ending Diagonal Pattern. I mentioned that this wave up would NOT be straight up; that it would have several corrective waves along the way.
When wave “e” up started, the Dow was trading at 14,719. It rose to a high of 16,588 for a gain of 1,869 Dow points after The Professor gave his Buy Signal (142 new longs). If you multiply those 1,869 points by 38 percents, which is what you would expect in a normal wave 2 retracement, you get 710 Dow points. Then if you subtract those 710 points from 16,588, you get 15,878 as the target for wave 2 down. Yesterday the Dow closed at 15,879, one point away from its target. Amazing!!! In other words, all yesterday’s decline did was complete a NORMAL 38 percent wave 2 retracement.
As you know, I always say that no stock, no matter how good goes to heaven. This also goes for markets. That’s why as the SPX was getting close to the 1860 level, I mentioned that I was taking a few bucks off the table. It was unrealistic to assume that the S&P would push beyond that without some type of correction.
So this morning, we need to ask ourselves, was the recent decline the end of the world like the commentators would have you believe? Or was it a normal wave 2 correction? Hmmm?
One thing that could help us answer that question is The Professor algorithm. I mentioned how The Professor previously helped us identify the 1,869 point rally in the Dow by highlighting over 100 stocks. He was telling us that a new UP tend was developing and that there was a good possibility that it would be very strong..
Then along the way, on 18 December, he lit up again by highlighting 49/49 stocks on two successive days. This told me that the main UP trend was still underway, but would be a bit weaker. And as we saw, the Dow only gained 789 points after this Buy Signal.
But truth be told, the thing that impressed me the most about The Professor was how he kept me on the sidelines during the recent pullback.. He limited my exposure to TMF, the REITS, and SLB while the market was making its wave 2 correction. He never issued a Buy Signal. As a result, while the Dow was getting hammered yesterday, the gain in TMF more than offset the small loss I was taking from VNQ and SLB.
So in view of The Professor’s recent performance, I was very curious to see what he would say about yesterday’s strong decline. Would he be highlighting enough shorts for a new Sell Signal? Hardly. He only had 2 longs and 10 shorts last night. So while the talking heads were confused, The Professor saw yesterday’s decline as nothing more than a normal wave 2 correction Normal wave 2 corrections are NOT the start of a new downtrend.
The sky is NOT falling. It is NOT the end of the world.
Anyhow, I just wanted to give you my take on what happened yesterday. Hopefully it will give you a different perspective based on technical analysis, and not fear.
Marcia is just about ready to get up, and I need to do a few things with her later today. But I still want to talk about where I believe the markets could be heading from here.
I’ll save that discussion for tomorrow morning.
Meanwhile, have a great weekend.
That’s what I’m doing,
Yesterday, I talked about why I believe the recent decline in stocks is likely part of a wave 2 retracement and not the start of a new down trend. The two main reasons I cited were the fact that Friday’s pullback stopped at a perfect 38 percent retracement level, and The Professor was not signaling that a new down trend was starting.
There are several other reasons as well. The Dean’s List is still positive because the QQQ and UUM (Russell 2000) remain on the List near the bottom. However DXD and SDS, the inverse ETFs for the Dow and S&P 500, have now appeared on the List, so we need to be cautious.
Friday’s reading of the A-D oscillator was only -101.96. When the market is in a crash mode, this number usually moves below -200 and stays there for an extended period.
Also, Friday’s EXTREME volatility also produced a set-up for another VIX Buy signal Buy Signal, as the VIX closed above its upper Bollinger Band. So IF the market starts to rally early next week, it will put another Buy Signal on the board. The last few VIX Buy Signals have been very reliable in predicting market rallies.
But this is the key. The markets MUST rally to trigger a new Buy Signal. If they continue to fall, QQQ and UUM will drop-off the Dean’s List and it will turn negative. And given that we are in the final wave of an Ending Diagonal Pattern, where the final wave “e” of the pattern has a history of truncating, we MUST protect ourselves against the possibility that the Dow has already topped at the 16,588 level and last week’s trading action was the start of a new down trend. At this point we simply do not know. The odds still favor a Bullish resolution from the triangle pattern, but this could change in a hurry.
We need to rally! And this is why I do not plan to do any new buying until I see The Professor generate a new Buy Signal. The markets are at a very critical point in the overall Ending Diagonal Pattern now, so the risk of buying at current prices without The Professor giving say so is high.
This is why I will be paying close attention to Monday’s trading action.
I should also mention that Friday’s plunge was actually positive from two other perspectives. The fact the decline happened at the end of the week should give the Plunge Protection Team an opportunity to meet and decide what actions, if any, they are gong to take. The banks and most major corporations are loaded with excess reserves at this point, so this money could be used to buy back stock and keep the rally going for a few more months. It will also give the large Mutual Funds time to assess their portfolios and re-balance which tends to give the markets a positive bias going into the end of the month.
Also, the Fed will meet on Tuesday with Janet Yellen as its new Chairman. The eyes of the world will be focused on what she has to say about continued tapering. After all, it appears that most of the pressure on Emerging Market currencies is being blamed on the Fed’s tapering. So it will be interesting to see if she continues to taper, stops it, or starts to stimulate again. The next few days should prove to be very challenging for the new Fed Chairman. This is what happens when market rallies are built on Fed juice, and not real growth.
As for stocks to trade, I’m reluctant to take any new positions now. TMF has moved up near the top of the Dean’s List, but it’s still too early to tell if the current rally in Bonds is part of the eventual breakout I believe is coming. The ETF is still in a downtrend, and until it ‘Jumps the Ropes’ and completes a wave 2 Blade, it’s still only a ‘date’. There is still a good chance that the long bond can fall a bit lower before it starts to climb to 150-160. I see no rush to add additional shares here. I’m just using my strategy for ‘Trading the Turns’.
Same for gold and gold stocks which have rallied as equity prices declined. Royal Gold (RGLD), my favorite gold stock, has popped about 6 points since turning Green a few weeks ago. But others like AU and AUY are still having problems moving above the 200. Also, gold the metal, still looks pretty sick. Until all of the gold related issues start to show me solid ‘Rope Jumps’, I just can’t get excited about gold and the other metals. I still believe that the odds favor lower prices.
Anyhow, I just wanted you to know some of the things I will be watching going into next week.
The key word is ‘watching’. I do not believe this is the time to be establishing new positions. I feel the risk is way to high. Let’s let the market tell us what its next move is going to be. Then we can decide on how we’re going to trade it.
That’s what I’m doing,
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