Professor’s Comments February 4, 2014
Posted by OMS at February 4th, 2014
The Dow plunged another 326 points, closing at 15,373. The SPX fell over 40 points to 1742. So in 7 trading days, the SPX has fallen over 100 points. The market is now EXTREMELY oversold.
By closing below 15,411, the Dow moved under its 200 day moving average. So now the Dow has developed a THT Pattern complete with a downside ‘Rope Jump’. During the next few weeks, I expect the Dow to rally back to the 16,100 -16,300 level in an a-b-c retracement. After that, I would expect wave 3 down to begin. And based on the trading we have seen the past few days, the wave 3 decline could get ugly.
I should mention that while the Dow moved below its 200 day moving average, the broader SPX and NASDAQ did not. Both indexes are still well above their respective 200s, so the equity markets are still not in any danger of entering a Major down trend anytime soon. It will take several weeks of trading action before this can happen. This is one of the reasons that The Professor algorithm did not get excited about the recent decline. Remember, The Professor is a trend algorithm that identifies major rallies within an overall up trend. I use the algorithm to confirm changes in the DMI. It is highly unlikely that The Professor will become active to the down side until equities start to move below the moving averages to confirm a new down trend. However, because the 50 is still above the 200 in all of the equity indexes now, it will be interesting to see if he starts to highlight 50 or more stocks during the next a-b-c retracement rally.
Last night, the A-D oscillator came in with a reading of -200.09. Readings this negative are usually followed by a significant rally to relieve the severe oversold conditions within 1-2-days.
The VIX also closed at 21.44, which is above its Upper Bollinger Band. This generated a Set-Up for a VIX Buy Signal. Once the VIX closes back below its Upper Band, a new VIX Buy Signal will be generated. This new Buy Signal will likely be generated today if the market starts to rally.
It is also worth noting that the VIX closed above the 20 level. The last two times the VIX had readings above 20 occurred on 24 June and 9 October which produced rallies of 1,100 and 1,400 Dow points.
Gold, the metal was strong yesterday, but most gold stocks were not. Royal Gold, RGLD, fell 1.09 points to 54.85. Royal had a ‘Rope Jump’ about a week ago, so now I would expect it to pull back to form a Blade as gold (the metal) starts to move lower. This is one of the reasons I bought a few shares of DUST yesterday.
It still appears that gold needs one more leg lower to complete its Major Wave 4 triangle pattern. Nothing happened yesterday to change my view that gold will trade near 1150 or below in the weeks ahead.
And because of this, I started buying shares of DUST just after the market opened. By the close, my shares were up about 2 points. I also mentioned that I was looking to buy XIV, the Inverse VIX ETF, which I did looking for a decrease in volatility.
Another ETF that had a good day yesterday was TMF. The ETF was up 1.94 points as equities declined. During the weekend, I talked about TMF and how it had a recent ‘Rope Jump’. So when it rallied, I sold most of my holdings and will now wait for a pullback ‘Blade’ to develop before I start to get serious about bonds again.
I received an email from Tom Y. yesterday saying he was having fun with TMF and TVIX for over a week now. Tom said that the reason he selected TVIX was because it mimics VXX (which is on the Dean’s list). He mentioned that he bought both ETFs as ‘trades’ when the DMI turned positive and was now managing his money. This is the type of email I love to receive. Tom recognized the TLB Pattern, saw the ETFs on the Dean’s List and bought his shares as a ‘trade’ when the PT indicators turned positive. And then when he saw a ‘Rope Jump’ on TMF, he recognized it as a wave 1 and started to manage his money knowing that a wave 2 pullback was about to begin. Hearing about what Tom did yesterday brought a smile to my face.
Looking for the markets to rally from EXTREME oversold conditions.
That’s what I’m doing,
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Category: Professor's Comments