Weekend Strategy Review September 15, 2013

Posted by professor  at September 15th, 2013

Well after being home for one day and having a chance to devour an entire foot-long Subway sandwich, I feel a lot better.  They put a Subway in St. Vincent’s Hospital, and every time I had to have an x-ray done, I could smell the Subway fresh baked bread.  All I wanted when I got home was a $5 foot long!

While I was in the hospital, I had a chance to think about a lot of things.  And because of this, I decided to write this weekend’s WSR a little differently.   A lot has happened in the past six weeks, and many of them are related to the things we have been talking about for the past 3 years.   So anyhow I thought it would be good to review some of this today.   I really believe that if you fully understand how we got to where we are now, it will help you plan your moves going forward.   If you understand the signs and patterns that got us to this point, when things start to turn ugly later this year or early next,  you will know what to look for and be able to take the appropriate actions,

If you recall back in late June when wave B was bottoming near the 14,550 low, we started to talk about how the market would likely make one more run up to complete wave C of major wave E up.   We knew that this final wave of Major Wave E up should develop in 5 waves and completed somewhere just under 17,000.

We used our knowledge of proportionality and added 1200 Dow points to a low of 14,550 to come up with a target of 15,700 for wave 1 of C-up. The Dow actually got as high as 15,658 less than 50 points from our projected target.

At that point we started to look for wave 2 down to come in.  We watched as the Dean’s List started to turn negative and projected a target near 14,850-15,000 for wave 2 down. This target was calculated using the interim low between the first two highs of wave 1 up.

The actual low for wave 2 down turned out to be 14,760.  So because we knew that wave 2 down was coming, we exited most of our positions near 15,600 and simply waited for wave 2 down to complete before re-establishing our long positions.

As we got toward the end of August we saw that the DMI on the Dow and most other indexes was solidly negative, so it was pretty comfortable being out of the market as it was falling.  We knew that wave 2s usually have a mind of their own and could fall all the way back down to the 6/24 low if it wanted to.  So we just waited and watched for signs that wave 2 down was over.

Do you remember what we were looking for in those first signs of a bottom?  Correct, they were the VIX Buy Signals.  As a matter fact we had three of them.   But we knew that VIX Buy signals are usually early, so we were only on standby alert.  With the market trading at 14,800, we were ready. But we needed to see more signs.

One of the first signs we saw was the QQQ and QLD starting to re-appear on the Dean’s List. This told us that the NASDAQ was getting than the Dow. And by 3 September, its DMI on the QQQ had actually turned positive.

So we knew that something was happening. We had early VIX buy signals on the board and we now the Dean ws confirming strength on the NASDAQ.

But we also knew that we didn’t have to rush into new positions.  We had just witnessed a wave 1 up and a corrective wave 2 down, so we knew that the next wave up would likely be an impulse wave up, a wave 3 up.  And wave 3s are usually nice long rides. So we wanted to be sure.  Before taking major positions, we wanted the market to tell us that it was starting to trend.

So we checked in with the Professor, our trend algorithm.   We saw that The Professor was awake.  He was no longer in his usual slumber mode, and had started to highlight a small number of stocks that were starting to trend. However the numbers were still below 50 which told us that a significant trend was still not under way.  But then on Monday, 9 September, with the Dow still trading under 15,000, The Professor started to become extremely active.  I started to run The Professor just after the open, and by early afternoon, he was highlighting over socks 50 giving us the all clear sign that wave 3 up was underway.  To the best of my knowledge, no other analyst in the world was able to identify and confirm the start of wave 3 up any earlier.  By Friday, the Dow was at 15,375, up almost 400 points since The Professor made his call.

Another thing we were doing while we waited for wave 2 to bottom, was looking for stocks we wanted to Buy for the initial ride of wave three up.  We knew that the Dow had corrected almost 900 Dow points during wave 2 down, so we were looking for stocks that were holding their own during the correction. We were looking for strong stocks.  But we also wanted fresh stocks.   We didn’t use a high priced subscription service that listed stocks that were over a month old.  What good would that have been?  No we wanted a fresh list!   We wanted to know which stocks were correcting sideways for the past few weeks, as opposed to those that had been falling with the overall market.  We knew that the stocks that were correcting sideways were strong stocks that would lead the overall market higher. 

So we used the Member’s Watch List.  Only now, because we were looking for stocks that were correcting sideways or only pulling back slightly, we looked toward the middle of the Member’s Watch List.  Specifically, we looked for stocks that were in well-defined uptrends that had formed nice Hockey Stick Patterns.  And because they were moving sideways for the past few weeks instead of falling with the overall market, the Bollinger bands on the stocks would be nice and tight.  We knew that this ‘Band Squeeze” would propel these stocks higher as wave 3 up started to commence.

Stocks like Schlumberger, SLB, BAIDU.com, BIDU, and Gilead Sciences, GILD, fit this pattern perfectly.  SLB was trading between 80 and 81 in early September.  It hit a high of 87 on Thursday.  BIDU was trading in the low 130s in early September.  It reached a high of 148 on Wednesday.  Both had beautiful patterns with nice tight Bands.

One of the things we were not doing was trading AAPL.  Even though the news media was hyping Apple’s release of several new iPhones this week, we were not interested. That’s because we saw that Apple was still in a downtrend with its 50 below the 200. Yet we saw that Apple had formed a Three Lows to a Bottom (TLB) Pattern and had recently jumped the ropes on 13 August, it was still not time to be getting involved with the stock. The rope jump had identified the rise in Apple since 24 July as a potential wave 1 up, so we knew that Apple would still have a lot of work to do after the rope jump, as part of its wave 2 development.  And as a result we saw Apple fall over 40 points during the latter part of the week. The stock remains in a downtrend with the 50 still below the 200.  However the 50 is now getting extremely close to the 200, so if during the week, Apple starts to move above 475, it will move the 50 above the 200 and put Apple into an uptrend. This will be one of the things that you might want to watch next week.  If Apple starts to move higher and the PT indicators turn positive, I’m a buyer. 

The Weekly Chart on Apple shows it to be in a well-defined uptrend.  And the steep decline that has taken place since September 2012, appears to be a normal wave 2 correction. If I’m correct about APPL being in a normal wave 2, the stock should easily test its old high of 705 on the next leg up.  But remember we still need to see positive PT indicators now on the daily chart before that can happen.  So pay attention to those indicators and not the folks on CNBC next week. Like I said if Apple starts to turn positive now, I want to own some.

Anyhow, it appears that wave three up is starting. I believe this wave should take us to the 16,200 to 16,300 level.  That’s about 1,000 Dow points from where we are now. Once we get over 16,000 we should start to look for corrective wave 4 to develop.  That’s where I’ll be looking to take a few bucks off the table and manage some of my money.

But not now. Wave threes are places where I like to get aggressive. And that’s what I’m doing now.  Remember we have three VIX buy signals on the board, a Professor who is screaming at us, a very positive Dean, and positive PT indicators.

Right now I’m dancing with my early partners and have plans to ride this horse.

Have a great weekend.

That’s what I’m doing,

h

F

AQ

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.