Professor’s Comments January 7, 2014

Posted by OMS  at January 7th, 2014

The Dow fell 45 points, closing at 16,425. Volume was heavy, coming in at 124 percent of its 10 day average.  There were 135 new highs and only 14 new lows.

It appears that the correctiive ‘Blade’ I talked about last week is now starting to develop.  I said I don’t like to trade corrective patterns, and after yesterday’s intraday swing of almost 125 points, you now know why. If you bought into yesterday’s open, you’re likely wondering why at the end of the day.

I would expect to see more of this choppy trading in the days ahead as the market continues to fill out the Blade.  Yesterday the SPX got as low as 1823.73 before closing at 1826.77.

During the weekend, I mentioned 1820 as a support level that I’m watching closely.  As long as the SPX holds above this level AND the Dean’s List remains positive, I’m not worried.  The pullback will likely prove to be a buying opportunity.  If the pullback starts to drop below 1800, then something else is likely starting to happen and I’ll have to re-evaluate my positive bias for a Dow of just under 17,000.  But not now.

Right now, I see a lot of Red showing on the cockpit. And when I see Red, I always wonder if a new downtrend could be stareting.

So I stopped by Professor’s office last night to see if anything was brewing on the short side.  The sign on his door said “Go Away – No Trend: only 2 longs and 6 shorts.  I didn’t even bother to open his door.  When I start to see The Professor identify 20-30 or more stocks as shorts, that’s when I’ll get concerned that the current correction is developing into somthing more than a typical Blade.  If he highlights 40 or more stocks as shorts, I’ll start to take action.  Otherwise, I’m on the sidelines waiting for him to wake up again.

The Senate confirmed Janet Yellen as the new Fed Chairman yesterday, with her new term starting on 1 February.  I fully expect that she will continue to stimulate the economy for the foreseeable future at a rate close to $75 Billion per month.  All this new money should keep Wall Street very happy.

BTW, to put $75 Billion a month in perspective, the only thing I can even think to do it with is aircraft carriers.  A few years back, when I was working for SECNAV, the cost of an aircraft carrier with its air complement was about $3 Billion.  The Nimitz-Class carriers that have been around since 1972 cost $4.5 Billion.  The new Ford-Class carrier comes in at about $13 Billion, just for the ship!  In other words, the Fed is printing enough money to buy 5.7 new Nimitz-Class aircraft carries a month.  Imagine if that money was actually spent on building these behemoths.  There wouldn’t be enough room in the harbors of Norfolk or San Diego to accommodate them all.  They’d be piling up on the beaches!  Maybe that’s why a good part of the new money is going to Wall Street.  It won’t create an eye sore.

Anyhow, I don’t see much happening for the next few days.  Nothing except choppy trading action.  Be patient.  This is a time for caution.  If prices start to fall below 1820 on the SPX, the current pattern is likely NOT developing into a Blade, and you’ll wonder why you were so anxious to buy stocks.

Watching.

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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