Weekend Strategy Review July 27, 2013

Posted by professor  at July 27th, 2013

The Dow rose 3 points on Friday, closing at 15,558.  The index was up 15 points on the week. The Nasdaq was up 8 points on Friday, and up 25 points on the week.  Volume was light on the NYSE, coming at 89 percent of its day average.  There were 110 new highs and 44 new lows.

Before I get into the pattern and wave counts, I want to make a point about the new highs and  new lows that I just mentioned above.  I want you to notice how they have been getting much closer to each other now than they were several weeks ago.  Back then we were seeing over 400 new highs and only a handful of new lows consistently.  But not now.  And because they have been getting closer together, mostly because of a decrease in new highs, it has caused the Hi-Lo indicator to turn down (negative).  The Hi-Lo indicator is one of my primary indicators for measuring market breadth.  The Summation Index is the other. It is still heading up, but on Friday, it closed flat.  I always like to trade in the direction of this indicator.  If these breadth indicators start to turn negative next week, it would be a very clear sign that the internals have weakened to a point where wave 2 down could begin.  So please be cautious next week.  Things could be about to change.

Big Picture Strategy:  Short tern, the Dow appears to be close to completing wave 1 up of final wave ‘C’ up.  Longer term, I’m still looking for the Dow to move toward 16,880 in a five wave sequence. 

Looking at the trading action during the past few days, the market had every opportunity to start a corrective leg down, but it didn’t.  Instead it rallied back strongly, especially after it was down over 100 points on Thursday and Friday.  If you put the trading action since 18 July under a microscope, you will see that the Dow has closed within 17 points of the 15,550 level every day for the past 6 trading days..   However during that time period, it has experienced several wide swings of more than 100 points each day.  Amazing!   This trading action has been largely ignored by Wall Street, especially the folks trying to make sense of what’s happening in the markets right now.  But from Class, we know that this narrow range, down-up-down-up trading action that goes nowhere is usually associated with the development of a triangle.  And we know that triangles usually appear in wave 4s.  We also know that wave 4 triangles are the Blades of a Hockey Stick Pattern that support a wave 5 rally.  So once the wave 4 Blade completes, odds are that the markets should have one more rally, a wave 5 up, before wave 1 up of final ‘C’ up completes.  Why don’t the folks on CNBC know this?  Maybe they need to read my book?  Hmmm?

The wave 4 can also be seen on a 60 min chart of the SPY which closed near 169 on Friday.  Based on this chart, I would expect the SPY to exceed 170, and push close to 172 into next week.  The Dow and Nasdaq should experience similar rallies, with the Dow likely  pushing Dow 15,700+ near weeks end.

The Dean’s List is very long now, and all of the PT indicators have switched back to positive, which also supports a near term rally.  However looking at the diverging P-volume, and a Hi-Lo indicator that is heading south, I am more inclined to use any rally into next week as a selling opportunity.  I DO NOT see the market going to the moon (defined as Dow 16,880) on the current rally leg.  The chart of the Dow I posted last week shows wave 1 ending near 15,700-15,750.  I’ll stick with that for now.   I’m gonna hold off on making any projections for wave 3 up until I see where wave 2 down ends.  Right now all of my current projections, including the final high of 16,880, are based on the Dow completing wave 2 down near the 15,000 level.  This level is an approximate 50 percent retracement of the wave 1 rally that started on 24 June from 14,551.  If the retracement is significantly lower than 15,000, then it will change the odds and projected levels for the final rally legs of wave ‘C’ up.  BTW the odds of reaching 16,880 go down significantly if the retracement is equal to or more than 62 percent of wave 1, so IF this occurs, we will need to factor this into any projection of a final high.  But right now, I’m still looking for wave 2 down to complete near 15,000.  That’s the level where I will be looking to aggressively enter and trade the market indexes for the final ride up.

If the Dow starts to approach 15,700 during the week, you might want to think about lightening up, and then start watching for the wave 2 down to develop. 

Remember too that not all stocks are going to participate in this final rally leg of wave 1 up.  Some stocks have already started to move lower.  That’s why the breadth indicators are starting to stall or head south.  And on the decline, remember that the 15,000 level I talk about for the Dow is an average.  Some stocks will fall a lot more than the average.  If your stock is already starting to fall, odds are that it will be one of them.  So be careful.

Emeritus highlighted two stocks last night for the Honor Roll.  I’m not terribly excited about either one.  But the fact that he’s highlighting these stocks now also supports a wave 5 rally.

Also, with Royal Gold heading the Dean’s List, I should say something about gold.   Since 23 July when the DMI on Royal turned positive at 50.84, the stock has been trading sideways, marking time.  When I talked about gold last week, I said that I would not be interested in gold until I see a Blade of a Hockey Stick develop.  That could be occurring now, but it is still way too early to tell. For my money, gold is still a very risky bet at this point.  If the Daily DMI turns negative next week, there is a good chance that Royal will trade significantly lower.  The DMI on the physical gold ETF, GLD, turned negative on Friday, and as long as it remains negative, there is a good chance that GLD could be headed for one more leg lower, possibly below 114.68.   So even though Royal currently leads the Dean’s List, remember we always use the List in combination with the SIGN.  And the SIGN says we need to see our stock on the Dean’s List, with a Pattern and positive PT indicators.  And right now because the DMI on the physical gold ETF is negative, I’m still very cautious about gold stocks. 

Here’s the thing.  IF gold is completing its Major Wave 4, there will be plenty of opportunity to ride the gold train higher. Be patient.  Wave 5 up will take it to new highs, probably close to 2,300-2,500 or higher.  So I need GLD show me that it can at least jump above and stay above the 50 currently located at 129.05 with a positive DMI.  That’s not too much to ask for next week.  If it CAN NOT do that, it’s telling me GLD will likely make one more wave down.  

Have a great weekend.

That’s what I’m doing,

h

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.