Professor’s Comments April 1, 2014
Posted by OMS at April 1st, 2014
The Dow rose 134 points, closing at 16,457. Volume was light on the rally, coming in at 90 percent of its 10 day average. There were 143 new highs and only 8 new lows.
Last night, when I ran The Professor, he had 36 new longs. In other words, we are likely getting very close to generating a buy signal.
When I look at the current patterns on the Dow (DIA), SPX, and NASDAQ, all appear to be forming various types of sideways to down Bullish Wedge Patterns. These patterns are basically forming the ‘Blades’ of large Hockey Stick Patterns that should move the markets significantly higher during the next 4-6 weeks.
As of today, the patterns still do not appear complete, as the pattern on the SPX argues for a small move up today to the 1880 level, then a pullback to about 1870.
Here’s the thing: We know all of the patterns that are forming on all of the indexes are very Bullish continuation Patterns. And last night, after seeing the Professor with 36 longs, we know that something Bullish is going on. But as of today, we still don’t have a Buy Signal.
However, IF we get a small pullback during the next 2-3 days, most of those 36 longs that showed ‘trend’ last night, will likely come off of their trend signals, but will still be lurking just under the radar. Then on the next rally leg, probably later this week or early next, these signals will be joined by several other stocks that are just finishing their patterns.
The combined total should be more than enough to generate the 50 or more longs required to generate The Professor’s Buy Signal.
One thing that we know about The Professor is that he usually give us quality signals. When I say quality, I’m talking about tradable moves anywhere between 600 to 2,000 points. Right now, the ‘Stick of our Hockey Stick Pattern on the Dow is suggesting a move above the 17,200 level. So IF the Professor is right, we could be looking at a move of about 800+ Dow points. In other words, about 4-5 percent on the Dow. If you choose carefully and select the strongest stocks to trade during the rally, the move could easily be 10 percent or more.
You often hear me talking about my 5 wave chart, where I show the rally waves 1, 3 and 5, and the two pullback or consolidation waves 2 and 4. When I talk about this chart, I use it to show students where I want to be aggressive and stay in the market, and then the periods where I want to be cautious. During the rally waves, especially waves 3 and 5, I like to put more money at risk, and follow my trend indicators. During waves 2 and 4, I pull in my horns and become defensive by scalp trading with smaller positions.
I often talk about how trading is an odds game, where I only put my money at risk when the odds are favorable. And right now I believe that we are approaching one of those periods.
With over 800 points of upside potential in the Dow, I can start taking positions during the next few days and then place a mental stop about 200 points below current levels. This would give me a reward-risk ratio of about 4:1. I like those odds. Anytime you can get 2.5 to 1 or more at any 50-50 game of chance, it’s worth playing.
Also, if you think about it, The Professor usually give us 4-5 Buy signals each year. Last year was an exception where we had seven. But IF you can get an average 7.5 percent return during each of the 4 tradable rallies (on average), that’s a potential return of 30 percent per year. This is why I pay so much attention to periods when The Professor appears to be getting active.
I received several emails yesterday asking about ETFs in the Healthcare Equipment group. I don’t know of any that are specifically focused on the equipment side of Healthcare, but IYH (mostly domestic stocks) and IXJ ( mostly global stocks) have about 25-30 percent of their portfolios in Healthcare Equipment. I put both of these ETFs into the data base for the Dean’s List. As of last night, neither ETF is on the Dean’s List. So remember the SIGN: Dean’s List, Pattern and Indicators.
Just about all of the ‘equipment’ stocks that I mentioned in my WSR had a nice rally day yesterday. So did most of my energy issues. I did sell a few shares of my overweighed position in Halliburton (HAL) yesterday to free up some cash for stocks in other groups.
During the past few weeks, it seems like I was buying HAL on every dip, and had accumulated an overweighed position. All I did yesterday was to get this position and my position in Gulfport Energy, GPOR, back down to a more normal size. I still want to hold energy going into April. Besides, as of right now, my algorithms are not highlighting any group or sector that is anywhere near as strong as energy.
So all I’m doing today is watching my radar screen to see if any other groups or sectors are starting to strengthen. If I see something, I’ll let ya know.
BTW, I also received an email yesterday from Gene S. telling me he was having some fun with CORN. I mention CORN today mostly for the newbies, because it recently formed a TLB pattern and then turned Green on 2 February. Now, I’m never crazy about CORN, but when you see it on the List, as Gene did, you might want to have a look at what DBA, the agriculture ETF did during the same period. Hmmm?
Ok, so with this knowledge, now you might want to look at something near the bottom of the List, like EUO, the Proshares Short Euro. Now, I’m not saying that I want to buy these shares either, even if they turn Green! It’s like watching grass grow. But EUO has a nice TLB Pattern in place. It’s still RED, but IF it starts to turn Green during the next month to six weeks, it will be a BIG Warning sign, and tell me a lot about what’s happening in Europe. And that’s something that I will want to know and trade.
That’s what I’m doing,
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Category: Professor's Comments