Weekend Strategy Review January 4, 2015

Posted by OMS  at January 4th, 2015

With the Bullish end of year holiday bias now behind us, the markets are now entering a phase where they will have to fend for themselves.

On Tuesday and Wednesday, the Dow fell 55 and 160 points respectively, only to gain back about 10 of those points on Friday.   The OTC market didn’t fare as well, dropping 29, 41, and 9 points in the same three-day period.

This negative action caused 2 or the 3 PT indicators on the Dow and NASDAQ to turn negative.  So now the only holdout is MACD momentum indicator.  It’s still positive.

The end of year decline also caused a change in the Dean’s List.  Right now, I’m still showing the List as  positive (GREEN) on the cockpit.  But it should be YELLOW, as only 2 of the 4 positive index  ETFs, DDM, and IWM, are now on the List.  The two inverse index ETFs for the NASDAQ and S&P500, QID and SH, are now present.  So the List is neutral.

The status of the Tide has also changed to neutral.  While all 4 of the breadth indicators on the NYSE are still positive, two of the 4 breadth indicators on the NASDAQ have now turned negative.

So this weekend we have mixed indicators.  With mixed indicators I’m on the sidelines waiting.  I still believe that it is too late to be buying stocks and too early to start shorting.

With mixed indicators and a pattern that appears to be nearing completion, my strategy is to wait.

Last week, I talked about two possible scenarios for the Dow.  The first scenario suggested that the Dow would top somewhere between 18,000 and 18,350.  The second scenario suggested that the Holiday rally was part of a wave 3 up in a 5-wave sequence.  If this is the case, the Dow will likely rally above the 19,000 level.  As things stand this weekend, I still CAN NOT eliminate either one of these scenarios.

However, because the DMI on the Dow and NASDAQ turned negative during the week, I now have to be more concerned about declining prices than any further increases.  So with a change in the DMI, I ran The Professor algorithm.

As most of you know, I use The Professor trend algorithm to tell me if a new down trend is starting.  It helps eliminate false alarms during a DMI change.  The Professor normally spends most of his time ‘sleeping’, usually only highlighting 1 or 2 stocks on most days.   So most of the time I don’t pay any attention to The Professor.  It’s only when he wakes up after a DMI change that I pay attention.  I want to know how many stocks he is highlighting.  If the number is greater than 50, it tells me that a lot of stocks are entering the trend mode and a powerful uptrend is likely starting.  In the past these up trends have resulted in gains of 600 to 1,800 Dow points.  So it pay$ to watch The Professor.

However when I ran the algorithm on each of the last three days, the maximum number of shorts that The Professor identified each day was 8.  Normally I need to see about 25-30 shorts to verify a downtrend.  So with only 8 stocks being highlighted, it tells me that while my indicators and Lists are changing, a new significant down trend has not started yet.  BTW, I found it interesting that several of the stocks that The Professor was highlighting were European country ETFs, like EWN (Netherlands) and EWU (United Kingdom- chart attached). This tells me that Europe might be starting a new down-trend. And what impacts Europe usually flows over into the American markets.  Hmmm?

BTW, I will be talking a lot more about what I’m seeing in Europe in the weeks ahead.  I will also be discussing some of this during Monday night’s Update session at UNF.  If you haven’t signed up for the Class, you might want to give Valerie a call.  I believe the Class is sold out at this point, but she might have one seat left. Valerie’s number is 904-620-4255.

So with mixed indicators and Lists, and a non-confirming Professor, I can’t say that a new down trend is starting, nor can I eliminate either one of the two positive scenarios on the board.

On Friday, the A-D oscillator rose 9.62 points to close at 18.74.  The reading was a small change from Wednesday’s reading of 9.16.  There are two items of significance with the readings.  The first is that with a small change reading, we need to be on the lookout for a Big Move within the next 1-2 days.  The second is that IF a Big Move occurs, and it is to the downside, it will almost certainly turn all of the breadth indicators that make up The Tide negative.    So watch the early trading on Monday.  If it starts to turn negative, odds are high that not only will the Tide turn negative, but the MACD on the Dow and QQQ will turn negative making all of the PT indicators negative.  A large decline on Monday will also likely drop the two positive index ETF, DDM and IWM off the Dean’s List turning it negative as well.

Bottom line:  I want to see what happens on Monday before I do anything else.  Too many things can change with an A-D oscillator so close to zero.

Have a great weekend.

That’s what I’m doing,

h

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