Professor’s Comments January 6, 2016

Posted by OMS  at January 6th, 2016

The Dow rose 10 points, closing at 17,159.  Volume was heavy again, coming in at 124 percent of its 10-day average.  There were 104 new highs and 91 new lows.

Yesterday’s small pullback appeared to be a minor wave 2 consolidation. It was enough to put a nice ‘Blade’ on Monday’s large down ‘Stick’. If this is the case, wave 3 of 3 down could be ready to start today. This next down wave should be impulsive, so I will start holding some of the short positions I established yesterday.

Remember, now that the Dow has broken through the 17,100 level on Monday’s decline, I have to assume that the Ending Diagonal Scenario is now in play.  This scenario projects am initial target below 16,000 on the Dow with a retest of the 24 August low likely.  So as long as The Tide and the Dean’s List remain negative to neutral, I have to assume that the market is going lower.

So yesterday, I started to get short.  Tony K. recently asked if I could provide an example of how I was starting to do this.  So this morning, I want to talk about two of the stocks I was watching yesterday.  Both came from yesterday’s Honor Roll.

The first thing that you need to understand about these trades is that the market is starting to transition into a down trend.  It’s NOT in a down trend yet.  It only recently (Monday) broke out of its large consolidation pattern, so most of my trend indicators are still neutral. 

On the other hand, The Professor algorithm highlighted 70 stocks as shorts on Monday, so he’s giving me a head’s up that a significant down trend could be starting.

So yesterday I started to get short using the 10 min bars to enter the positions.  The two stocks I was watching were both from yesterday’s Honor Roll, Checkpoint Software (CHKP) and Mellanox Technologies (MLNX).  The reason I considered these stocks was because Emeritus, my trend algorithm, was saying they could be starting a down trend.

After an initial pop, the Fast Stochastic on CHKPs 10 min bars started to move below the zero line, giving me a heads up that the stock was getting ready to move lower. 

Then at 10:50, the Money Flow indicator turned negative.  At the same time, the Fast Stochastic fell below the 20 line, indicating that a downtrend could be starting.  The next bar confirmed the downtrend as the Aroon Indicator entered the downtrend mode by rising to the 100 level.  After the entry, it was simply a matter of managing money.

If you entered the trade when the first two indicators turned negative, which is what I usually do, the trade produced a maximum profit of slightly over a buck.

The short trade in Mellanox developed about the same time (10:50), but by 10:10 the Fast Stochastic was already signaling to get ready to short the stock.  The trigger came at 10:50 when the Chaikin turned negative.  After chopping around for a bit, the stock finally went into the trend mode at the noon mark.

Now all of this should be standard procedure for most of you by now. This is what we have been doing with our scalp trades for the past two months with Honor Roll stocks.  But now that the Dow has broken out of its two-month consolidation period and could be about to enter the Trend Mode, instead of getting out of these short positions by the end of the day, I’m now starting to hold a few positions overnight.

Remember, when the market is in a consolidation zone, I trade smaller positions.  But now that it appears that we’re breaking out to the downside, I’m establishing larger positions at the entry point.  I’m getting more aggressive.  This allows me to take some money off the table and let the rest ride overnight if the initial ‘scalp trade’ is profitable.

I’m not afraid to hold a few shares overnight now because the odds favor a downtrend.  I’m trading in the direction of The Tide and my Lists. And I’m only trading stocks that Emeritus is telling me are starting downtrends on the Daily Charts. If I’m right, the large moves we’ve seen for the past two months within the consolidation period should be mostly to the downside. 

The thing I’m watching now is for all of my Trend Indicators on the indexes to enter the Trend Mode.  Once this happens, I’ll start holding my short positions as long as the down trend continues.  In other words, I’m slowly shifting from a scalp trading mode to more aggressive Short and Hold Strategy.  It’s what we do in the Professor’s Methodology.  We are extremely cautious (scalp trade) during consolidation periods, and slowly become more aggressive (short and hold) as the market starts to enter the Trend Mode.  Before, without a clear trend in place, there was no point in holding stocks overnight.  There was way too much risk.  But now that the markets could be getting ready to enter the Trend Mode, we need to change tactics.

Just remember that it’s still early, so don’t become too aggressive yet.

That’s what I’m doing,

h

Market Signals for

01-06-2016

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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