Professor’s Comments August 7, 2013

Posted by professor  at August 7th, 2013

The Dow fell 93 points, closing at 15,518.  Volume was moderate on the decline, coming in at 98 percent of its 10 day average.  There were 124 new highs and 91 new lows.

It appears that wave 1 up of ‘C’ up completed with a high of 15,658, and wave 2 down is now underway.  I expect that wave 2 down will take the Dow down to the 15,000 level as a minimum.  The 2 July low of 14,858 is also a strong possibility, as this level is the interim low between the first two highs of wave 1 up.  So for now, I’m going to say that wave 2 down should bottom somewhere between 14,850 and 15,000.  But there’s one thing we know for sure.  Wave 2’s have a mind of their own, and can do strange things.  They are the most unpredictable of all the waves.  So please be careful.  This corrective wave can easily morph into something much more complicated.

While yesterday’s 93 point decline in the Dow was larger than normal, a good portion of it was due to one stock, IBM, which fell over 4.5 points.  On the surface, one might want to discount yesterday’s decline somewhat, but I believe that would be a mistake.  That’s because IBM’s decline was part of an inverse Hockey Stick pattern, which now puts the stock in a severe downtrend. And because of this, it will be extremely difficult for the Dow to make any sort of meaningful rally now that Big Blue is moving lower.

The Dean’s List remains fairly long after yesterday’s decline, but weakened considerably.  The Relative Strength of the majority of the issues on the List is now mostly 1s, and 0s.  Several things caught my attention when I looked at the List last night:

While the Dow has weakened, the Nasdaq remains fairly strong, with QLD and QQQ near the top of the List.  But this is because of Apple’s heavy weighting in the Nasdaq100.  After completing a TLB pattern in late June, AAPL has gained over 70 points and is now trading at 465.  It turned Green on 17 July at the 430 level, so the move to 466+ was not surprising.  That’s what we expect to see when the Indicators turn Green after a TLB pattern.  But the thing that I find interesting about AAPL now is that yesterday, the stock ‘Jumped the Ropes’.  Hmmm?  So now, we’re gonna have to watch AAPL during the next few weeks.  Will it develop a Blade?  We’ll see.  If a wave 2 Blade develops in Apple, this could be the springboard to take the markets significantly higher later this year.  I am now going on an Apple watch.  Show me a Blade!

The fact that the OIL related ETFs were still high on the List, while most gold issues fell tells me that gold will likely need to make one more leg down to complete its Major Wave 4.  I would expect this final wave down to end near the 1150 to 1200 level.  If this decline happens, that’s where I’ll look to go mining again.

TBT remains high on the List, and held up well in yesterday’s decline.  A wave 2 decline in the indexes should chase a lot of investors out of equities and into Bonds during the next few weeks. This should put pressure on TBT, which looks to need a small pullback before it can move higher..  As I mentioned yesterday, I am watching TBT closely now, and IF it falls to the 72 level as part of a ‘blading’ process, I will become very interested.

But the thing I got me excited when I looked at the List was the fact that EEV , the inverse Emerging Markets ETF has re-appeared.  If the US markets are going to correct during the next few weeks, EEV and FXP, the inverse China ETF, should start to emerge.  It’s one of the things I have been waiting to see occur as  wave 2 down starts to unfold.  Now don’t get me wrong, I’m still not sure if there will be a direct correlation between US markets and the Emerging Markets and Asia going forward.  As a matter of fact, money could start flowing out of the international markets and into the US for the remainder of the year.  But right now, all I care about is that EEV is back on the Dean’s List, with a nice, well developed HS pattern, that appears to be a wave 2.  Once complete, the pattern  should help move prices higher in a ‘potential’ wave 3 up.  By re-appearing on the Dean’s List, EEV now has 2 of the 3 elements of the SIGN.  All it needs now is positive indicators.

FXP has still not been able to bump FXI, the positive China ETF, off the List.  But remember, while FXI currently has positive PT indicators, it is in a well established downtrend.  In this respect, it is very similar to the pattern that gold has been in for the past few weeks…temporarily correcting a downtrend.  But now that EEV is back on the List, I would expect FXP to show up fairly soon.  Then with both FXP and EEV back on the List, I’ll be watching closely for positive indicators.

The two inverse international ETFs mentioned above could be a nice place to be to ride out the wave 2 storm I see coming in US markets.  At the very least, you might want to look at them as a hedge for a portion of your portfolio. 

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

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