Weekend Strategy Review September 29, 2013

Posted by OMS  at September 29th, 2013

The Dow fell 70 points on Friday, closing at 15,257. It was down 207 points for the week.  On the other hand, the NASDAQ was up 17 points on Friday, closing at 3,781. It was up 7 points for the week.

Clearly the NASDAQ is the stronger index at this point.  Both QQQ and QLD are on the Dean’s List whereas DXD and SDS, the inverse ETFs for the DOW and S&P 500 have appeared advising caution.  This strength/weakness between the indexes is something that should be factored into any decision relating to stock purchases during the next few weeks.

Big Picture Strategy:  With the S&P falling back to the 1690 level on Friday, it sets up the possibility that a wave D could be developing instead of a wave 2.  If 1690 is broken early in the week, odds are that the S&P will trade down to the 1660-1665 level.  If this happens, I would expect a significant rally to begin from those levels as Major Wave E up unfolds.  Bottom line: Be careful during the next few days.

One of the reasons for this possible morphing of wave 2 into Wave D is because of what happen yesterday.  That’s when the House dug in its heels and passed a short-term government funding bill that will delay the implementation of Obamacare and permanently repeal a tax on medical devices. The move sets-up a face-off with Senate Democrats and President Barack Obama on Monday and drastically increases the chances of a government shutdown on Tuesday.  Remember, Obamacare is the Presidents signature piece of legislation, so he will not likely give up the fight easily.  If the government is shut down next week, the S&P will likely break 1690 and test the 1660 level.  On the other hand, If for some reason things change and the Republicans decide not to fight the President over the Obamacare words in the Continuing Resolution, the fight will likely be delayed until 17 October, when the debt ceiling issue will come back into focus.

All this sets up an interesting possibility.

If you recall what happened back in early August 2011, the last time the two parties fought over raising the debt ceiling, TMF, the 20+ year Bond Fund was something that benefited greatly.  In the two months that followed the debate, TMF rose from 39 to over 80.

So when TMF quietly moved to the top of the Dean’s List during the week, it caught my attention.

In my last Update Class at UNF, I talked about how Bonds appeared to be getting very close to a bottom, and how interest rates could be heading a lot lower.  Earlier this year, when Bonds were trading near 147, I talked about how the long Bond could trade down to the 126 level.  It actually got as low as 130.  But now Bond prices appear to be bottoming.

If you look at a daily chart of TMF, you can see that the ETF has formed a TLB pattern.  The PT indicators turned Green last Monday with the stock at 47.6.  The following day, it jumped the 50 and spent the rest of the week resting on the 50, closing at 48.71 on Friday.  If I’m correct about the markets topping later this year, I believe that during the next few months, money will start to flow out of the equity markets and into Bonds, causing their price to rise.  TMF is currently still in a downtrend and needs to do a lot of work before it reverses.  However because it has a TLB pattern in place, the next step in the turn around process will be for it to rise above the 200, currently at 58.10.  That’s a potential move of 10 points.

And as you know, the first step in any potential turn around process is for the PT indicators to turn Green after a TLB pattern.  That’s where I always look to Buy a small lot and treat the shares as a trade.  Remember, TMF can only be considered a trade at this point because the shares are still in a downtrend.  It will be a trade until it ‘Jumps the Ropes’ or until the PT indicators turn Red.

But with positive PT indicators after a TLB pattern, and seeing it at the top of the Dean’s List, with a scenario that could boost Bond prices, I have to seriously consider a trade in TMF.

Next week could prove to be a very testing week for the markets. Just remember that no matter how ugly things get in Washington, the ‘cloud’ will pass.

Have a great weekend.

That’s what I’m doing,

h

FAQ

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.