Professor’s Comments February 12, 2016

Posted by OMS  at February 12th, 2016

continued to talk about interest rates before Congress.  It seemed like the more she talked, the more the market fell.  Volume was heavy, coming in at 110 percent of its 10-day average.  There were 37 new highs and 710 new lows.

A few days ago I talked about the problem with current Major Wave 2 scenario.  I said that as long as the Dow did not fall below the 20 January low of 15,451, I would still have to consider the decline as part of the Wave 2 scenario.

Well, with Yellen jawboning the markets down, the Dow reached a low of 15,503, coming within 52 points of the 20 January low.  Once she stopped talking, the markets steadied and then rallied for 145 points.  The rally produced several nice scalp trades to the long side.

Here’s the thing:  When the Dow was down over 400 points yesterday, and the analysts on CNBC were acting like a bunch of ‘Chicken Little’s’, I never heard any of them talking about the ‘b’ wave of an a-b-c retracement.  They didn’t know what to do.  They just panicked.  Most of them were talking about selling stocks and buying gold.  Hmmm?

If you were on the sidelines before the day began, you were looking for a wave ‘b’ bottom. I talked about this yesterday. You knew that wave 2s usually take the form of an a-b-c retracement, and as long as 15,451 was not exceeded, there was a very good possibility that the world was not coming to an end, and that once Ms. Yellen finished her comments, the market would rally. 

And that’s pretty much what happened.  BTW, yesterday’s rally was also helped along by a news report that the Saudi’s were planning to cut the production of crude oil.  The timing was perfect to complete wave ‘b’ down.

So what happens now?  Hmmm? 

Well, once again, all of the above discussion depends on the Dow’s ability to hold the 15,451 level.  As long as the Dow stays above that level, I have to assume that yesterday’s decline was the completion of wave ‘b’ of Major Wave 2 up.  I also have to assume that wave ‘c’ up of the a-b-c sequence will take the Dow back up close to the 17,000 level. That’s about 1,340 points from where the Dow closed yesterday.

So if I look at the market as a rational technician would and use the 20 January low as a stop, I calculate 219 points of downside risk vs. 1,340 points of a potential upside reward.  In other words, long trades from current levels have a better than 6 to 1 reward-risk ratio.  

So if the market opens higher today, I will start looking for scalp trades in the energy sector.  Remember, today is 12 February and as the March-April time period approaches, I have to be looking for energy trades.  And after seeing DIG pop on yesterday’s news, I have to assume that IF the Dow starts to move higher, it will be led by oversold stocks in the energy sector.  As long as the Dow holds 15,451, this will be my baseline strategy for the next three months.

Right now, DUG is on the Dean’s List. So I can’t get too aggressive with my energy purchases yet.  Remember, seeing DUG on the Dean’s List got us out of energy last May.  And as long as it remains on the List, I have to remain cautious until it is replaced by DIG, the positive ETG for energy. 

But we know that energy ETFs have a lot of garbage in them and tend to react slower than some of the energy rabbits, like Gulfport Energy (GPOR).

Right now there are two energy socks on the Member’s Watch List:  GPOR and Schlumberger (SLB).  In my opinion, SLB is NOT an energy rabbit.  It’s just a solid energy company.  So seeing it appear near the bottom of the List along with GPOR might be an indication that something is happening with energy.  Hmmm?

OK, so now let’s look at the pattern. 

The first thing I always look for in a stock after it has been beat down is a TLB pattern.  I MUST see three lows to a bottom.  Both GPOR and SLB have at least three lows. 

Then I need to see a bounce off the lows, and the formation of a ‘Blade’.  Hmmm?  Both stocks now have a small ‘Stick and Blade’ pattern. 

The final thing I need to see is a positive and diverging Money Flow indicator.  The Money Flow indicator on SLB is actually higher now than it was on 3 November when the stock was 13 point higher. Interesting. 

Now you might want to take a quick look at the two attached charts for SLB and GPOR.

OK, so instead of worrying about all the doom and gloom that you heard yesterday, I want you to think about the positive things that tend to happen in the spring. I want you to think about what happened last spring when we were trading energy.  And the year before that.  And the year before that. 

I’m starting to get a warm and cozy feeling..

As long as the Dow holds 15,451, I’ll be looking for opportunities to trade energy. 

That’s what I’m doing.

h

Market Signals for

02-12-2016

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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