Weekend Strategy Review March 1, 2014

Posted by professor  at March 2nd, 2014

The Dow rose 49 points on Friday, closing at 16,322.  It was up 218 points for the week.  The broader SPX rose 5 points on Friday, closing at 1859, which was a gain of 23  points for the week. There were 229 new highs and 19 new lows.

Friday’s high on the Dow was 16,398, which is only about 50 points from the 16,450 level that I have been talking about in my ‘Under the 31 December high scenario”.  And once the Dow hit the 16,389 level, it quickly dropped 163 points down to 16,226 before rallying into the close.

After watching Friday’s trading action, I have to conclude that there’s whole lot of resistance near the 16,400 level that the markets will have to overcome before moving higher.  It won’t be easy.

The Dean’s List remains positive and all of the cockpit indicators are Green again, so the market bias remains positive.  However, The Professor is still not showing any strong trend developing and without a strong trend in place, this market could still continue to have the large intraday swings that we have been seeing for the past two weeks.

And because of this, I remain very cautious.  All I’m doing now is cherry picking.

What do I mean by this?

Well, as you know from my comments on these pages, I currently own a few shares of several energy stocks and health care REITS. I purchased most of these after they were highlighted by Emeritus for the Honor Roll.

One of the reasons I have been doing this is because the Dow is not trending.  The Professor has NOT given a trending Buy Signal.  BTW, on Friday, he only had 26 longs to go with 2 shorts.  So he’s positive, but not that positive.

So I look to cherry pick.  All I have been doing is watching a few of the stocks highlighted by Emeritus.  For the past few days, I have been talking about Halliburton, HAL, which was highlighted by Emeritus for the Honor Roll a few weeks back.  We know that Emeritus is a trend algorithm, so when he places something on the Honor Roll, there is a good chance that the individual stock will start to trend.  But given that the overall market is NOT trending, stocks like HAL will need to fight hard for any potential gains they might make.  Nevertheless, they still have trending potential.  So these are the stocks that I want to pay particular attention to while the overall market consolidates for its next move higher.

Ok, what do I mean when I say ‘pay attention to’?  What am I watching?

Two things really.  The first is to see that a pattern is in place with narrow Bands that will support a move higher.  If I see this, and the stock is in an Uptrend, I will establish a Basic Position in the stock.  That’s what I did with HAL on 7 February.

But once I’m into the stock, I start looking for periods when the 2-period RSI Wilder becomes oversold.  That’s why I bought a ½ position in HAL on Thursday.  The 2-period RSI Wilder was in oversold territory when the stock was near the 55 level.

But there was more to it than that.  More importantly, the pullback was the first time the stock became oversold after turning Green on 7 February.  In other words, all those traders who missed the boat on HAL on 7 February, were just waiting for a pullback so they could jump aboard.  And that’s why the stock popped over 2 points during the next two days.

We saw the same thing happen with Merck, MRK, after it was highlighted by Emeritus.  Same for others like RTN, CJES, HCN, and eBay after they were highlighted.  The first pullback is usually a very opportune time to purchase a stock, whether it is your initial position or a short term trade.

Most times a trending stock will give you at least one other opportunity to buy it based on an oversold 2-period RSI Wilder.  But after 2 times of going to the well, I start to get cautious.   That’s because after the second pullback, the stock could be forming a THT Pattern, and the next pullback low could be the start of a new downtrend.  Go ahead…trace it out on paper so you can see how this occurs.

The first pullback is the wave 2 low, the second is usually a wave 4 and then …ouch!

So be careful, especially now.

A lot of stocks are forming this type of pattern now.   It’s one of the reasons that I’m dumping shares wherever the 2-period RSI Wilder enters overbought conditions. 

It’s also why ‘cautious” is the word for my Big Picture Strategy this weekend.

BTW, we had another ‘small change’ signal from the A-D oscillator on Friday, so be on the lookout for another Big Move early next week.

Have a great weekend.

That’s what I’m doing.

h

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