Professor’s Comments August 9, 2013

Posted by professor  at August 9th, 2013

The Dow rose 27 points in choppy trading that appears to be part of a wave 2 correction, closing at 15, 498.  Volume was moderate, coming in at 101 percent of  its 10 day average.  There were 150 new highs and 92 new lows.

Several things are happening now that are telling me this is not the time to be buying stocks.  The three biggest have to do with breadth and volume.  At this point, all of my breadth indicators are either negative or heading down,  Same for the P-volume. Which is not only negative, but is showing severe negative divergence.  And this is coming at a time when the A-D oscillator has been negative for the past nine days, which tells me that the majority of stocks on the NYSE have started down trends.  These are not the conditions that support higher prices..

The other thing that is happening now is that the Bollinger Bands on the indexes are starting to tighten.   The past 4 weeks of sideways trading has caused the Bands to narrow to the point where the could support a Big Move by ‘squeezing  the toothpaste’.  And with negative breadth and diverging volume, that Big Move could be down.

The Dean’s List is still long and positive, so until it starts to weaken, I’m not looking to trade the short side.  But many of the stocks I’m looking at now are starting the support Three Highs to a Top (THT) Patterns.  So be careful.

If your stock or ETF is in a THT Pattern, remember that I like to short stocks with THT Patterns as soon as the DMI turns negative.  This is because the THT Pattern is a reversal pattern.  With this pattern, and its counterpart, the TLB Pattern, all it tells me is that a stock or ETF could be in the process of reversing.  When the DMI turns, I don’t know for sure if the move is the initial leg of a major reversal process.  But it could be.  That’s why I only consider the DMI turn in this pattern to be a  trade.   But if the move starts to jump the ropes, and forms a Blade, that’s when I know that something more serious is taking place.

And either way, whether he stock is reversing or not, a DMI turn after a TLB Pattern usually leads to a move of at least 5 percent of more.  We saw this with Royal Gold recently after it popped over 7 percent from its recent TLB Pattern.  At this point, it’s still not clear if Royal is in the process of reversing or if it will make one more leg lower.  But traders who took the trade when the DMI turned positive are now up about 4 points.   A DMI turn after a THT or TLB Pattern is always something to pay attention to, especially when the breadth and volume indicators on the overall  market are supporting the DMI turn.

Last night, Emeritus highlighted three stocks as longs which also happen to be potential Rifle Trades.   All three are in Up trends on the Daily’s and have pulled back to the point where they are now oversold.  With the overall market likely to put pressure on these trades, they could continue to correct even more.  So pay attention to the 60s.

Remember too that IF the overall market is in a wave 2 correction, not all stocks will participate in a downward correction.  Some will just correct sideways and form triangles.

I received a question from a subscriber yesterday about BIDU.  Now as you know, I do not ordinarily comment on stocks held by individual subscribers.  But in this case, because BIDU has been highlighted by Emeritus on several occasions, I thought I would use it an example.

During the past month, BIDU has skyrocketed from the low 90s to over 140.  This move was directly related to the Hockey Pattern that is clearly visible on the Daily Charts. The thing to note is that because of this move, BIDU has moved from a downtrend into an Up trend.  However it is now up over 20 points from its moving average.

Whenever stocks make quick moves like this, they usually pause and wait for the moving average to catch up, or they pull back toward the average.  This correction usually takes the form of a triangle, which could be either sideways or slightly down.  In either case, with such a large gap between the price and the average, I would expect further upside to be limited.  However, once the stock corrects, I would expect the Up trend to continue. 

Here why I believe what I said above, and why I’m using it as an example today.

If you pull up a chart , you will see the on 7 June, BIDU  ‘Jumped the Ropes’.  This identifies the move as wave 1.  The pullback that occurred into early July formed a Hockey Stick Pattern that was likely the wave 2.  So given that waves 1 and 2 were in place, it makes sense that the move from 90 to 140 was the impulse wave or wave 3 up.  If BIDU pulls back now and forms a wave 4 triangle, it would set up another HSw/Blade Pattern that once complete, should push higher as wave 5 up unfolds.

Bottom line:  We’re likely in a wave 2 correction that could shave about 5 percent off the averages from the recent highs.  Some stocks will correct more than 5 percent, some less.  If your stock is in a clear THT Pattern and the DMI turns negative, it could be one of those that corrects 5 percent or more.  If your stock is in a pattern like BIDU, the correction will likely form some type of triangle.

I noticed that TBT fell off the Dean’s List last night and was replaced by TLT, the positive 20+year Bond ETF.  Hmmm?   Are you concerned why this happened?   Remember a few days ago, I mentioned that TBT could fall to the 73 level as part of its corrective process.  Now the ETF is trading at 75.56.  But before you panic and head for the exit, remember that the indicators on the Daily’s are still positive. Also, I want you to look at BIDU and compare it with TBT.  Notice the similarities?  Hmmm?  It gives you a different perspective, doesn’t it?

Watching the 60s for potential Rifle Trades.  With emphasis on the word ‘trade’.

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

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.