Weekend Strategy Review January 29, 2017

Posted by OMS  at January 29th, 2017

The Dow fell 7 points on Friday, closing at 20,094.   It was up 267 points for the week.  The NASDAQ finished up 6 points on Friday and up 105 points for the week.

Friday’s small decline on the Dow was accompanied by weak internals. The decline caused the Hi-Lo and Up-Down oscillators to turn negative, turning The Tide neutral.

So once again, the cockpit indicators are mixed. 

Given that the overall pattern on the Dow and the other major indexes suggests a Major Top could be approaching, I thought it might be a good idea to review a few of the strategies we use to trade market turns.

Let’s start with my original strategy, The Basic Pattern, List, DMI Strategy:  This strategy simply says that to buy any stock or ETF, it must have one of the two patterns I use in The Professor’s Methodology.  A student MUST see either a Hockey Stick or a Three Lows to a Bottom (TLB) pattern.  The stock or ETF being considered MUST be on one of my Lists, either the Dean’s List or the Members Watch List.  If these two conditions are satisfied, the equity is bought when the DMI turns positive.  This is a simple, effective strategy for trading stocks or ETFs.

The second strategy I use to trade index ETFs is Trading with the Tide.  It is my favorite strategy for trading market turns.  I usually allocate about 40-50 percent of the funds in my trading account to this strategy.  The strategy is based on four of the breadth indicators that make up The Tide turning either positive or negative.  Then  when all four of the breadth indicators turn positive, I buy index ETFs  as they start to appear on the Dean’s List.  If The Tide turns negative, I buy INVERSE index ETFs.  This simple switching strategy tends to keep students in the market for longer periods of time as the index ETFs can be held when The Tide turns neutral.  Students can also manage (sell) their index ETFs when they drop off the Dean’s List or when the indicators turn negative.

My third strategy is Sticks in the Sand.  I love this extremely simple strategy!  Especially when the market is approaching a time period when I believe the conditions are favorable for a seasonality trade, like energy.  This strategy simply watches for ETF pairs, like DIG-DUG (energy) or TLT-TBT (Bonds) or UUP-UDN (Dollar) to replace each other on the Dean’s List.  For example, when the calendar moves into the February, March, April time period, which are usually the best months to trade energy, I look for DIG to appear on the Dean’s List.  Once I see DIG o the List, I buy a few shares of the ETF AND also look for other energy ETFs or stocks to appear on my Lists.  In other words, seeing DIG on the Dean’s List tells me that conditions are favorable for trading energy.

However, I don’t just trade the energy ETFs during this period. This is because the energy ETFs, like other ETFs, have a lot stocks in them.  Some of the stocks in the ETF are good, some are bad.  So, when DIG appears on the Dean’s List, I look to trade a few of the strongest energy stocks on the Member’s Watch List.  By doing this, I know that I am in the strongest stocks in the energy sector.  

The final strategy I want to review this weekend is my new Sector Rotation Strategy. This strategy keeps students in the strongest sectors of the market, even when the overall market isn’t going anywhere.  It also keeps students in the strongest sectors when the market turns, so it’s a very powerful strategy.  For example, when the indicators turned positive in early November, students could have bought a few index ETFs using one of the above strategies.  They all produced nice returns. However, if a student bought shares in the three strongest sector ETFs, the average returns would have been about 2-3 times what they would have been for a basic index ETF.  Again, when you buy an index, you get a lot of junk.  When you buy a strong sector ETF, you still get some junk, but at least its stronger junk.

Also, when the overall market is consolidating and not trending, like we saw in July – October, even though the overall market wasn’t going anywhere, some of the strongest ETFs had really nice gains.  The algorithms behind the Sector Rotation Strategy identified these strong sectors producing gains that averaged about 10 percent. 

Students might also think about using some of these strategies in combination with each other.  For example, if The Tide turns negative, students can look to buy a few inverse index ETFs from the Dean’s List.  But knowing the overall market is starting to turn negative, they can also look to establish short or inverse positions in the weakest sectors. 

Looking back at the Dean’s List on 8 November, Bank of America was the strongest financial stock on the Member’s Watch List.  But it was buried in the middle of the pack, so it’s likely that it would have been overlooked.  Not anymore!  Now that we have an algorithm that identifies the strongest sectors, If we noticed the cockpit indicators turn positive on 8 November, AND saw the sector report identify the Banks as the strongest sector, BAC would have jumped out as the stock to trade in the coming rally. BTW, BAC went from 17 to 23 in one month for a 35 percent gain!

Anyhow, after seeing 2 of the 4 indicators that make up The Tide turn negative, I believe it might be a good time to review and think about which strategy or combination of strategies you plan to use IF the indicators start to turn negative.

Spending time thinking and planning is always a good thing to do, and I like to do most of mine on weekends. Make sure you have your quiet time to think.

Have a great weekend.

That’s what I’m doing,

h

BTW, I didn’t forget about gold.  Most gold and mining stocks and ETFs are still forming ‘Blades”.  Gold, mining stocks and ETFs are still leading the Dean’s List.  Once the ‘Blade’ completes, they should move a lot higher. Be patient.

Market Signals for

01-30-2017

FAQ

Only getting the Professor’s Weekend Review? Try his daily update Cum Laude service fro 2 weeks only $9.99 LEARN MORE

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.