Professor’s Comments August 1, 2014

Posted by OMS  at August 1st, 2014

Hmmm?  What was it I was saying about declining breadth winning at the end of the day?  Happens every time.

The Dow dropped a whopping 317 points, closing at 16,564.  That’s over 460 points from where the market was on 7 July when the breadth first turned negative.  I’ll say it again…I NEVER like to trade the long side of the market when the breadth is moving against me. Never!

OK, so the market has started its next leg down.  We knew that there was a 4:1 chance that this would happen.  So where are we now? Is this the end of the world like some of the commentators on CNBC would have you believe? Should you buy gold and food and find a safe place to hide?  Hmmm?  No, No, and No!  Not yet anyway…

Well, why not?  What makes me think that yesterday’s drop was not the start of the end of the world? 

Well for starters, even though both the Dean’s List and PT indicators are negative and on Sell Signals, there is still a good chance that the markets will start some type of rally.  The markets are EXTREMELY oversold now as evidenced by an A-D oscillator reading of -275.52.  That’s a really oversold reading.  Usually when the A-D oscillator has a reading below -200, the market bounces within a day or so.  The only time the market doesn’t bounce after a reading like this is when it is crashing.  And right now I don’t see a crash occurring. That’s because during a crash, the Professor would be screaming that a new down trend is starting.  He’s not screaming now.  Last night he only highlighted 16 stocks as shorts.  That’s not what he does during a crash. 

On the other hand, what The Professor appears to be saying is that the current leg down toward 16,300 on the Dow (1900 on the SPX)  is likely the ‘a’ wave of an a-b-c retracement.  Remember, it still appears that the market is in a larger degree Ending Diagonal Pattern that likely has one more major rally leg to go once the current decline completes. 

The other thing that favors a rally is the VIX.  During yesterday’s decline, the VIX closed significantly above its Upper Bollinger Band generating a set-up for a new VIX Buy Signal.  So IF the market does rally, it’s likely that the VIX will close back below it’s Upper Band generating the VIX Buy Signal.  IF we get a new Buy Signal, just remember that these signals are usually early, and before they take hold, its likely that the market will have to complete its current retracement pattern (an a-b-c move) before the VIX Buy signal takes effect.

Yesterday’s decline dropped the Dow to 16,564.  That’s only about 260 points from the 16,300 level I have been talking about for weeks. The 200-day moving average is currently located at 16,289 and represents a natural target for support.

If you put a gun to my head, I’d say that during the next few days, the Dow will start to check its decline, then bounce to the 16,700 +/- level before declining to 16,300.  If this a-b-c retracement occurs, it would significantly increase the odds that the decline is part of the Ending Diagonal Pattern and NOT the start of the new Bear Market.  So IF…and only IF the current decline toward 16,300 takes on an a-b-c shape, I would view the 16,300+/- level as an outstanding buying opportunity.

However, before I buy this market, I want to see breadth start to improve.  Did I say that I hate to trade against declining breadth?  On the other hand, IF all four of my breadth indicators start to turn positive, I’m all in.  IF this happens, I’ll post the chart so you can see the indicators.  Otherwise you can assume that the indicators remain negative.  I’m thinking about adding a Green, Yellow, Red light to the cockpit so you will know the daily status of these breadth indicators.  It’s just easier to trade when all of the breadth indicators are on your side.

BTW, I sold a few shares of my trading position in TWM yesterday.  So now I have a few bucks in my pocket and have a free ride on my remaining shares.  When I sold my shares, I placed a stop back at my original entry point of 45.60.  If the market continues to decline and TWM starts to approach the 51 level, I will sell all of my remaining shares and wait.  On the other hand, IF the market starts to rally, and TWM drops below 46 again, I will add to my shares and re-establish my half trading position.

I don’t believe TWM is going to the moon on this trip. What’s happen now is likely just a test launch.  The moon shot will come later.

That’s what I’m doing,

h

BTW, did you notice how Emeritus did NOT highlight any stocks for the Honor Roll during the past week or so?  Pretty cool!  He didn’t want you in the market either :>)

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

The Hockey Stick Pattern
The Creation of Waves and Trends
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