Professor’s Comments December 19, 2013

Posted by OMS  at December 19th, 2013

The Dow rallied for 293 points after the Fed said it would start to taper its aggressive bond /mortgage buying program to $75 billion a month in January.  The rally pushed the Dow to a new record closing high of 16,168.

Yesterday’s rally was predicted by Tuesday’s EXTREMELY small chenge in the A-D oscillator.  Volume was heavy, coming in at 132 percent of its 10 day average.  There were 186 new highs and 85 new lows.

The SPX closed at 1810, about 3 points from its previous high of 1813.  Earlier this week, I mentioned that if the market starts to exceed 1813, there was a good possibility that a new pattern was forming. This morning, I want to spend a few minutes talking more about this pattern, because it now appears that it will drive the markets in the weeks ahead.

Here’s the thing:  For the past few weeks, I have been talking about wave “d” in the Ending Diagonal Pattern as being a normal a-b-c affair.  I was expecting the ‘c’ wave of this pattern to trade down to the 1740 level….IF the markets started to break down.  But they never did.  The Dean’s List never turned negative. The worst it got was neutral, when QQQ and SDS were both on yesterday’s List .  Also, The Professor never confirmed the negative DMI change on the Dow (DIA).

So instead of breaking down, the markets traded sideways in wave “d”.  This is worth further investigation and analysis.

Yesterday, I talked about how the this sideways trading has started to form what appears to be the Blade of a very positive Hockey Stick pattern.  Unfortunately, because last weeks high was not exceeded, neither pattern, up or down was confirmed after yesterday’s 293 point rally on the Dow.

So we need to put on our thinking caps and ask ourselves if the pattern for wave “d’ is not a simple a-b-c correction, then what is it?  Hmmm?

From Class, we know that corrective waves only come in two patterns.  A-b-c patterns and triangles.  When I say triangles, I really mean any pattern with more than three waves.  Triangle can come in many varieties, and include flags, wedges, etc.  The thing they all have in common is that they consist of 5 waves.

And that’s the key.  The five legs.

If I look at yesterday’s trading, I can now count four distinct waves since the 29 November top.  And IF yesterday’s 293 point pop was the fourth wave in the triangle, we should have one more leg lower before Major Wave “e” up starts to take hold.

This is very important to know, because if wave “d” is forming a triangle, it means that the buying opportunity I have been waiting for the past month is fast approaching.  Up until now, I have been saying that it was not the time to be buying stocks.  However because it now appears that wave “d” is developing a triangle, that buying opportunity may only be days away.   We need to re-think our timetable.

When we’re dealing with the final leg of a bullish triangle, one thing we know is that it usually does NOT go fall as far as the other legs.  Maybe about halfway.  So again, if we see the SPX drop close to the 1790 area, that should be about as low as it gets. Then IF the S&P holds 1790+/-, AND the indicators start to turn positive, AND I get confirmation from The Professor…..that’s where I will start looking to put money to work.  

Yesterday’s trading was interesting from a few other perspectives.

The first was that the Dean’s List turned positive as all three index ETFs moved back on the List.  Recall that on Tuesday, both the DIA and DDM had fallen off the Dean’s List turning it neutral.  So even though I turned the cockpit color Red, the List actually never went negative.

This second is that the DMI on the Nasdaq 100, QQQ, actually turned negative!  That’s right…after an almost 300 point rally on the Dow, the DMI on the QQQ turned negative.  Go figure. So as of now, we have mixed signals from the DMIs.

And even though there were mixed DMI signals on the cockpit, I decided to run The Professor anyway. …just to see what he had to say.  He too was on the fence, with 49 longs.  That’s pretty close to the 50 that I normally require to confirm a DMI change,  but it’s not anywhere near the 197 that we saw in October that led to the 1,400 point rally in the Dow.  If Major Wave “e” up is starting, I would expect a lot more than 49 longs from The Professor. But for now, it’s a moot point. That’s because even though The Professor is awake, with mixed DMI signals on the cockpit, there’s nothing for him to confirm.

And then there was the EXTREMELY small change in the A-D oscillator, which was predicting a Big Move.  Well, we got the Big Move, but today’s question is  whether the move was a one day relief rally within the triangle or the start of Major Wave “e” up?  I believe it was the former. There was a ton of short covering yesterday, and without real buying, I don’t see wave “e” up starting . So I’m gonna wait a few more days to see If we trade down to 1790. 

One other thing to keep in mind about yesterday’s Fed decision.. While the Fed said it was going to start tapering in January, the thing that got lost was the fact that that they will still continue to create over $75 billion per month out of thin air.  That’s still an incredible $960 Billion per year that will be added to the money supply.  Since the QE programs started, the Fed has created over $4 Trillion.   And while some of that money has found its way to Wall Street, pushing equity prices higher, a significant portion of that money is still being stashed in Banks.  And because of the lack of jobs and things like Obamacare, most Americans are not doing a lot of borrowing..

But at some point, all of this money will have to be extracted.  Otherwise it will start to move into the general economy and turn into M2.  If that happens, it will cause a significant increase in inflation. This is not happening now because of a weak job market and the poor economy.  People are afraid to borrow money for a new car or other consumables.  We saw what happened to Ford, F, yesterday as it was being hit for over a buck.

But one area that should benefit from the Fed’s decision to supply a lot of new low interest rate money for the foreseeable future is the housing market.  That’s probably why Emeritus highlighted Lennar, LEN, and placed it on the Honor Roll.

The stock recently completed a TLB pattern in early September and a Rope Jump in late September. Since then, LEN has been trading sideways, forming its Blade.  However because most of the Blade was formed below the moving averages, the 50 has still not crossed above the 200 to put the stock into an uptrend.

Lennar, and other home builders, like Ryland Group, RYL, all have similar patterns.  And when one starts to move, odds are that the others will too.

So during the next few days, I will be watching the home builders.  It’s not my favorite sector, but for now, it looks like that’s where the money is going.

Watching for a pullback to about 1790 on the SPX to confirm the triangle.

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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The Dow rallied for 293 points after the Fed said it would start to taper its aggressive bond /mortgage buying program to $75 billion a month in January.  The rally pushed the Dow to a new record closing high of 16,168.

Yesterday’s rally was predicted by Tuesday’s EXTREMELY small chenge in the A-D oscillator.  Volume was heavy, coming in at 132 percent of its 10 day average.  There were 186 new highs and 85 new lows.

The SPX closed at 1810, about 3 points from its previous high of 1813.  Earlier this week, I mentioned that if the market starts to exceed 1813, there was a good possibility that a new pattern was forming. This morning, I want to spend a few minutes talking more about this pattern, because it now appears that it will drive the markets in the weeks ahead.

Here’s the thing:  For the past few weeks, I have been talking about wave “d” in the Ending Diagonal Pattern as being a normal a-b-c affair.  I was expecting the ‘c’ wave of this pattern to trade down to the 1740 level….IF the markets started to break down.  But they never did.  The Dean’s List never turned negative. The worst it got was neutral, when QQQ and SDS were both on yesterday’s List .  Also, The Professor never confirmed the negative DMI change on the Dow (DIA).

So instead of breaking down, the markets traded sideways in wave “d”.  This is worth further investigation and analysis.

Yesterday, I talked about how the this sideways trading has started to form what appears to be the Blade of a very positive Hockey Stick pattern.  Unfortunately, because last weeks high was not exceeded, neither pattern, up or down was confirmed after yesterday’s 293 point rally on the Dow.

So we need to put on our thinking caps and ask ourselves if the pattern for wave “d’ is not a simple a-b-c correction, then what is it?  Hmmm?

From Class, we know that corrective waves only come in two patterns.  A-b-c patterns and triangles.  When I say triangles, I really mean any pattern with more than three waves.  Triangle can come in many varieties, and include flags, wedges, etc.  The thing they all have in common is that they consist of 5 waves.

And that’s the key.  The five legs.

If I look at yesterday’s trading, I can now count four distinct waves since the 29 November top.  And IF yesterday’s 293 point pop was the fourth wave in the triangle, we should have one more leg lower before Major Wave “e” up starts to take hold.

This is very important to know, because if wave “d” is forming a triangle, it means that the buying opportunity I have been waiting for the past month is fast approaching.  Up until now, I have been saying that it was not the time to be buying stocks.  However because it now appears that wave “d” is developing a triangle, that buying opportunity may only be days away.   We need to re-think our timetable.

When we’re dealing with the final leg of a bullish triangle, one thing we know is that it usually does NOT go fall as far as the other legs.  Maybe about halfway.  So again, if we see the SPX drop close to the 1790 area, that should be about as low as it gets. Then IF the S&P holds 1790+/-, AND the indicators start to turn positive, AND I get confirmation from The Professor…..that’s where I will start looking to put money to work.  

Yesterday’s trading was interesting from a few other perspectives.

The first was that the Dean’s List turned positive as all three index ETFs moved back on the List.  Recall that on Tuesday, both the DIA and DDM had fallen off the Dean’s List turning it neutral.  So even though I turned the cockpit color Red, the List actually never went negative.

This second is that the DMI on the Nasdaq 100, QQQ, actually turned negative!  That’s right…after an almost 300 point rally on the Dow, the DMI on the QQQ turned negative.  Go figure. So as of now, we have mixed signals from the DMIs.

And even though there were mixed DMI signals on the cockpit, I decided to run The Professor anyway. …just to see what he had to say.  He too was on the fence, with 49 longs.  That’s pretty close to the 50 that I normally require to confirm a DMI change,  but it’s not anywhere near the 197 that we saw in October that led to the 1,400 point rally in the Dow.  If Major Wave “e” up is starting, I would expect a lot more than 49 longs from The Professor. But for now, it’s a moot point. That’s because even though The Professor is awake, with mixed DMI signals on the cockpit, there’s nothing for him to confirm.

And then there was the EXTREMELY small change in the A-D oscillator, which was predicting a Big Move.  Well, we got the Big Move, but today’s question is  whether the move was a one day relief rally within the triangle or the start of Major Wave “e” up?  I believe it was the former. There was a ton of short covering yesterday, and without real buying, I don’t see wave “e” up starting . So I’m gonna wait a few more days to see If we trade down to 1790. 

One other thing to keep in mind about yesterday’s Fed decision.. While the Fed said it was going to start tapering in January, the thing that got lost was the fact that that they will still continue to create over $75 billion per month out of thin air.  That’s still an incredible $960 Billion per year that will be added to the money supply.  Since the QE programs started, the Fed has created over $4 Trillion.   And while some of that money has found its way to Wall Street, pushing equity prices higher, a significant portion of that money is still being stashed in Banks.  And because of the lack of jobs and things like Obamacare, most Americans are not doing a lot of borrowing..

But at some point, all of this money will have to be extracted.  Otherwise it will start to move into the general economy and turn into M2.  If that happens, it will cause a significant increase in inflation. This is not happening now because of a weak job market and the poor economy.  People are afraid to borrow money for a new car or other consumables.  We saw what happened to Ford, F, yesterday as it was being hit for over a buck.

But one area that should benefit from the Fed’s decision to supply a lot of new low interest rate money for the foreseeable future is the housing market.  That’s probably why Emeritus highlighted Lennar, LEN, and placed it on the Honor Roll.

The stock recently completed a TLB pattern in early September and a Rope Jump in late September. Since then, LEN has been trading sideways, forming its Blade.  However because most of the Blade was formed below the moving averages, the 50 has still not crossed above the 200 to put the stock into an uptrend.

Lennar, and other home builders, like Ryland Group, RYL, all have similar patterns.  And when one starts to move, odds are that the others will too.

So during the next few days, I will be watching the home builders.  It’s not my favorite sector, but for now, it looks like that’s where the money is going.

Watching for a pullback to about 1790 on the SPX to confirm the triangle.

That’s what I’m doing,

h