Professor’s Comments August 23, 2013

Posted by professor  at August 23rd, 2013

The Dow rose 66 points, closing at 14.964.  After noting several days of EXTREME oversold conditions from the A-D oscillator, the rally was expected.  Volume on the NYSE was light, coming in at only 83 percent of its 10 day average.  I suspect that a good portion of the light volume was due to a glitch in the software at the Nasdaq which froze trading for about three hours. There were 69 new highs and 74 new lows.

The A-D oscillator fell back into ‘neutral ’ territory, with a reading of -88.45.  The oscillator has been negative for the past 20 days, keeping me mostly on the sidelines.  Once this indicator turns positive, it will be another sign that wave 3 up has started.  All of my other breadth indicators are still negative, but appear to be bottoming.  When these indicators started to turn negative several weeks ago, I warned that stocks could be topping.  At the time I mentioned that I did not want to fight negative breadth.  Now it’s the reverse situation.  If the indicators start to turn positive now, I want to join them.

Yesterday’s rally caused the VIX to fall back below its lower Bollinger Band, generating a second VIX Buy Signal.  Like I said when the first VIX Buy Signal was generated, the signals are usually very reliable, however they tend to be a few days early.

The Dean’s List turned mixed yesterday, with the appearance of  QQQ and QLD.  So now if the positive Dow and S&P index ETFs start to appear, it would be a strong indication that wave 3 up has begun.

All I’m doing now is watching for my indicators to turn.

Because I expect the next rally phase to be a good one, I’m basically looking at two types of stocks now.  The first is a Rifle Trade.  And as you know, with Rifle Trades, I’m looking for stocks from the Member’s Watch List that are in Uptrends on the Daily Chart, with positive PT indicators, and have pulled back such that their 2-period RSI Wilder is oversold.  The place I have been looking for these socks is in the middle of the Member’s Watch List, not at the top.  That’s because I’m looking for stocks that have pulled back.  By moving these stocks to the middle of the list, the Dean is telling us that they are still strong and worthy of consideration. So that’s what I do.  I consider them and look to buy them when they are on sale….when the 2-period RSI Wilder tells me they are on sale. That’s when I pull out my Rifle and buy them on the 60s.

The second type of stock that I’m looking at now is one that is in an Uptrend, but has negative PT indicators on the Daily’s.  I can’t do a Rifle Trade on a stock with negative indicators on the Daily’s, because these indicators could be a warning that the stock is headed lower.  The negative indicators tell me to stay away.  I can NEVER buy a stock with negative indicators, because this would put me in the hope and pray mode.  I would have to hope and pray that the indicators would turn positive.  In the Professor’s Methodology, we never hope and pray.  We buy stocks with positive indicators and manage them when they turn negative.

So that’s what I’m looking for in the second category of stocks.  Stocks on the Member’s Watch List, in Uptrends with negative indicators.  A good example of this kind of stock is Gilead Sciences, GILD.

GILD is in a well defined Uptrend on the Daily’s, with negative indicators.  If you look closely at the stock, you can clearly see that there are two patterns in place.  The first is a beautiful Hockey Stick Pattern that started in the end of June, reaching a high on 26 July, then pulling back to form a Blade into August.  That 18 point ‘Stick’ makes for a pretty pattern. 

But here’s the rub.  While the stock has started to move up from its 15 August low, in what appears to be the next leg of the continuation pattern, we still don’t know yet if the continuation is occurring.  It could be that the recent 3 point move during the past 5 days is just the development of another Blade.  Only this time, the recent up move is part of pattern that projects a larger move down.  At this point, we simply don’t know.  And that’s why I need to see positive indicators on this kind of stock. 

If the indicators turn positive, with a 19 point ‘Stick’ there is a good chance the stock could be headed to the 73 level.  But if I bought the stock now, I would have to hope and pray that the indicators turn positive.  Otherwise I could be buying a stock that is setting up for a significant decline.  A decline that I could not protect myself against, because I bought it with negative indicators.  I would not have given myself the protection of positive indicators, so If they turned negative, I would not know when to get out.

Anyhow, that’s what I will be doing for the next few days.  Looking for Rifle Trades and looking for stocks that I can buy with all of the elements of the SIGN in place.

BTW, I don’t talk about this much, but it’s probably worth reminding you of it now.  I always talk about establishing my Basic Position (my Cake) and then using Rifle Trades (my eating Cake) to trade additional shares of the same stock.  But suppose I didn’t establish my Basic Position when all of the elements of the SIGN were in place.  Suppose I was on vacation.  Well, all I do then is use the first Rifle Trade to establish my Basic Position.

This is what I did yesterday with Johnson Control, JCI.  I missed the DMI turn back on 15 July when the stock was trading at 37.  Since that time the stock has moved up to the 40-41 level, where it has been forming a Blade for the past month.  The thing to note about JCI is that while the overall market has declined over 750 Dow points, JCI has been moving sideways.  Hmmm?  Pretty impressive!  It’s no wonder that the Dean is looking favorably on Johnson.

So with the stock in an Uptrend on the Daily’s, with positive PT indicators and an oversold RSI, I started buying a few shares when the 60s turned positive.  And because these shares are my initial position in JCI, I will manage them on the Daily Chart, not on the 60s as a normal Rifle Trade.  Also, because these shares were purchased with Rifle Trade criteria, I only bought a half position.  Because I bought them on the 60s and plan to manage them on the Daily’s, the trade contains more risk than a normal Basic Position.  So I bought less shares.  Also, from here on in, assuming that JCI continues to move up, all additional Rifle Trades will be sized at a ¼ position, so I don’t get top heavy.

The other stocks I have ben buying are SLB and RCL.  If the market starts to rally in the days ahead, I will be using Rifle Trades to establish positions in other stocks on the MWL with the characteristics mentioned above.  Again, the stocks must be on the List, in Uptends, with Positive PT indicators, and be oversold.

BTW, when I say that the PT indicators must be positive, I mean that if they were previously positive (Green) and during the pullback one or two of the indicators have turned negative, that’s OK.  For my purposes, they’re still Green.  They don’t turn RED until all of the indicators turn negative.  And if that were to happen, I would have to start all over again and use the SIGN to purchase the stock.  Like in GILD.

You get the idea.

That’s what I’m doing,

h

BTW, please forgive me for this rather long Update, but I will be away this weekend, and wanted you to have my “strategy” for the next few days, just in case something starts to happen today.   I only plan to do a brief Update this weekend, most likely on Sunday morning.

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

The Hockey Stick Pattern
The Creation of Waves and Trends
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.