Professor’s Comments December 24, 2013

Posted by professor  at December 24th, 2013

The Dow rose 73 points, closing at 16,294. Volume was low in the pre-Holiday trading, coming in at only 84 percent of its 10 day average. There were 347 new highs and 37 new lows.

With a positive Dean’s List, positive indicators and now even Apple (AAPL) getting into the game with yesterday’s 21 point pop; it appears that the wave “e” rally is underway.  Last week, I mentioned 1860 on the S&P as a likely target for this rally.  I said I would get back to you after I did further analysis. But as of now, I’m still gonna stick with 1860, and you’ll see why below.

One of the reasons for my caution has to do with The Professor. Last night he only identified 24 stocks as entering the trend mode.

So let’s think about this for a moment. Since the Dow and S&P issued their Buy Signals last week, The Professor identified 49, 49, and then yesterday’s 24 stocks as starting to trend.  We can compare this with the 197 that he identified on the first day of the early October rally.  When I saw The Professor highlight 197 stocks, it gave me the confidence to go all in.

Also, during the past year, we have seen several other times when The Professor identified rallies. And in each one, he highlighted over 50 stocks. But now we’re seeing The Professor being a lot more cautious. He’s wide awake and positive, but not door busting positive. Because of this, I plan to be a lot more conservative with my purchases.

Why might the The Professor be telling us to be cautious now? Hmmm? Well, for one thing, we know that IF the current rally is the start of wave “e” up, it will likely unfold in waves.  It will not be straight up.  It will also be the final rally leg of the Ending Diagonal Pattern. So after three successive days of nice gains, the market could be getting a bit tired.  It’s not overly tired because the A-D oscillator is still not that overbought with a reading of only 141.66. With a market that is still not overbought and the fact that we are now entering a period with a Bullish pre-Holiday bias and end of month re-balancing, the market should push even higher.

But as we saw with yesterday’s extremely light volume, traders are starting to think about other things now.  The three days of rally have produced a nice ‘Stick’ after the breakout from the wave “d” triangle.  When a breakout from a triangle occurs, the market has a tendency to pull back to the upper trend line of the triangle, which in this case is near 1813 on the SPX.  So given the positive Holiday bias, and the fact that the Professor is not exactly jumping up and down waving rally flags, there is a good possibility that a sideways to down Blade will form.  We will need a Blade to get us to 1860.  The SPX is currently at 1828.  If it pulls back to the 1810-1815 areal during the next week or so, that’s where I’ll look to put more money to work.

I received an email from Gene S. yesterday asking about how I came up with1860 for the S&P target I mentioned last week.  Here’s what told Gene.

The way I derived my target was taking half the 167 points from the 9 October low to the 29 November high, and then adding them to the 17 December low of 1777.  So 83 + 1777 = 1860.  This is my initial target for a potential move even higher.

But given that the current leg up is likely the final ‘e’ wave of an Ending Diagonal Pattern; it might not make it the full 167 points.  Remember…the Ending Diagonal is a termination pattern, so I want to be conservative.  Ending diagonals have a tendency to truncate!  If the wave goes beyond 1860, it will likely need to pause near 1860, and if it does, I’ll re-evaluate.  With diverging P-volumes on the DIA, SPY, and especially the QQQ, I have to respect that Ending Diagonal Pattern.

Gene also asked about what takes priority when making a decision to purchase a stock:  Pattern or market bias?  This is a great question, because it goes to the very heart of the Professor’s Methodology.  The answer lies with the SIGN.  I always use the SIGN when I look to buy something.  And my SIGN says Lists, Patterns and Indicators.  Market bias is NOT part of the SIGN.  Remember, even in the best of bull markets, usually only about 70-75 percent of the stocks are moving higher.  The rest are either trading sideways with no pattern or are heading down. A rising tide tends to lift all ships, but not the ones with holes in them.  That’s why I always look for stocks from one of my Lists, with a pattern and positive indicators.

This will be my last post until after the Christmas Holiday. I wish all of you a Merry Christmas and a happy holiday season and a healthy and prosperous New Year.

Spending quality time with my family.

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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