Professor’s Comments April 30, 2014

Posted by OMS  at April 30th, 2014

The Dow rose another 87 points yesterday, closing at 16,535. Volume was moderate on the rally, coming in at 111 percent of its 10 day average.  There were 122 new highs and 28 new lows.

The Fed will complete its 2-day meeting today and announce its plans for interest rates and continued stimulus at 2pm.  I don’t expect any major changes to the current tapering and interest rate policy.  In other words, the current policy should allow the markets to continue push higher.

The Dow got as high as 16,564 yesterday before pulling back. It did not break the 16,600 level to confirm that wave 3 up has started

The Professor was also relatively quiet, coming in with only 16 longs and 7 shorts.  Recall that when the Professor generated his most recent Buy Signal, it was a luke warm signal at best.  And so far, all we’ve seen from the markets has been luke warm trading.

Yesterday’s early rally and pause was very interesting from a pattern perspective.  Since the Dow made its recent low of 16,015 on 11 April, it gained over 500 points into its 22 April high of 16,565.   And since 22 April, the index has basically moved sideways.  Hmmm?  A 500 point run-up followed by sideways trading action.  Where have we seen this before?

If we take those 500 points and add them to the low of 16,312 made on 28 April, it projects a target over 16,800.  So going into today’s Fed announcement, there is a small Hockey Stick pattern in place that could support a break-out above 16,600.  We will know if this  pattern gets triggered today..

The only fly in the ointment I see is the Financial Sector.  Banks have not participated in the current rally. For the past two months, the only sector that has been moving up has been energy.  And as I’ve said before, I have a difficult time seeing how the Dow and the other indexes can move significantly higher without the financials.

On Monday, the Banking Sector was at its lowest point in over 2 months.  Usually when the Dow rallies without the banks, the Dow has a tough time trading higher over the short term.  So even though we have a pattern in place that can support a break higher, the fact that the financials have not participated in the rally is a concern.

The Banking Sector is appears to be completing a small negative Hockey Stick pattern which could take the sector several points lower. Until the pattern completes, it will likely be a drag on the Dow for the very short term.

What this means is that the scenario I talked about yesterday, where the Dow can trade down to 16,300 or lower, is still on the Board.  But even if this leg down starts to develop after today’s Fed announcement, I will continue to view it as a positive for the intermediate term, as it will solidify and complete the larger wedge pattern that should enable the Dow to trade at significantly higher levels.

All I’m doing today is watching to see how the market reacts to the Fed announcement.  The other thing I will be watching is gold.  I’m still looking for an entry point to put on a few shorts.  The Gold Bugs Index (HUI) has formed a nice inverse HS Pattern.  Currently trading near 227, if it starts to move lower after today’s Fed announcement, it could fall to 190, then 175.

That’s what I’m doing,

h

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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