Professor’s Comments January 8, 2014

Posted by OMS  at January 8th, 2014

The Dow rallied 105 points, closing at 16,531. Volume was heavy, coming in at 139 percent of its 10 day average.  There were 141 new highs and only 10 new lows.

OK, let’s put our detective hat on and try to figure out what yesterday’s rally was all about.

First of all, let’s review some of the things that got us to this point.  Let’s start with the 18 December breakout from the wave 4 triangle.  The initial move after the breakout took the SPX to the 1849 level.  This was just a few points from where I expected the market to pause near 1860.

I reasoned that IF the market was going make a run above 1900, it would need to pause and form some type of consolidation Blade pattern. This is what appears to be happening.

After hitting 1849, the SPX pulled back to 1823. I said that as long as the index stays above 1820, the odds favor a consolidation pattern.

From Class, we know that consolidations periods are either 3 or 5 waves.  So after the initial rise to 1849, the first pullback wave took the SPX down to 1823,  That was likely wave ‘a’.  Yesterday’s rally to 1840 was likely all or part of the wave ‘b’ retracement.   So from a wave count perspective, we should have either one more down wave to go to complete an a-b-c pattern, or 3 more legs if it’s a triangle.

But looking back, if we assume that the breakout on 18 December was from the wave “”d” triangle, then we know that wave “e” up should consist of five waves.  So in all likelihood, the rally to 1849 was wave 1.  And further, it this is the case, the pullback is a wave 2.  And the most likely scenario for a wave 2 pullback is an a-b-c pattern.

Bottom line:  The pattern should have at least one more down leg to go before the consolidation pattern is complete.

Last night, I checked in with The Professor. Only this time he was not sleeping.  His door was wide open and he was counting stocks. When he finished, his notepad said 17 longs and only 2 shorts.  I just walked away slowly, knowing that a rally was likely NOT starting.

The Dean’s List is still very positive and the cockpit indicators are mostly positive. The consolidation pattern or Blade that the market will need to take it higher apars to need at least one more down leg to complete.  So I’m still waiting on the sidelines.

About now, you might be asking yourself, why wait? If we know it’s a consolidation pattern, why don’t we just buy now? Hmmm? Well, the answer is that we don’t know yet. The next wave down should give us a pretty good idea. However, IF the next leg down starts to exceed 1820, all bets are off for a significent move higher. This is why I’m waiting.

That’s what I’m doing.

h

BTW, as you probably observed, there are a lot of precious metal stocks and ETFs on the Lists now.  .Yeah, I see ‘em too, but I’m ignoring them for the time being. They don’t have patterns. The pattern is the second ingredient in the SIGN For me to buy a stock or ETF, it MUST be on one of my Lists, have a pattern and positive indicators. Right now, most of the metals are missing a pattern, or have a sloppy pattern.

If I get a chance tomorrow, I’ll talk more about the metals and Bonds.  I’m still not excited about either, but I want to go over some of the things I’m starting to see,  so when the time comes, especially for Bonds, you’ll be prepared.

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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The Dow rallied 105 points, closing at 16,531. Volume was heavy, coming in at 139 percent of its 10 day average.  There were 141 new highs and only 10 new lows.

OK, let’s put our detective hat on and try to figure out what yesterday’s rally was all about.

First of all, let’s review some of the things that got us to this point.  Let’s start with the 18 December breakout from the wave 4 triangle.  The initial move after the breakout took the SPX to the 1849 level.  This was just a few points from where I expected the market to pause near 1860.

I reasoned that IF the market was going make a run above 1900, it would need to pause and form some type of consolidation Blade pattern. This is what appears to be happening.

After hitting 1849, the SPX pulled back to 1823. I said that as long as the index stays above 1820, the odds favor a consolidation pattern.

From Class, we know that consolidations periods are either 3 or 5 waves.  So after the initial rise to 1849, the first pullback wave took the SPX down to 1823,  That was likely wave ‘a’.  Yesterday’s rally to 1840 was likely all or part of the wave ‘b’ retracement.   So from a wave count perspective, we should have either one more down wave to go to complete an a-b-c pattern, or 3 more legs if it’s a triangle.

But looking back, if we assume that the breakout on 18 December was from the wave “”d” triangle, then we know that wave “e” up should consist of five waves.  So in all likelihood, the rally to 1849 was wave 1.  And further, it this is the case, the pullback is a wave 2.  And the most likely scenario for a wave 2 pullback is an a-b-c pattern.

Bottom line:  The pattern should have at least one more down leg to go before the consolidation pattern is complete.

Last night, I checked in with The Professor. Only this time he was not sleeping.  His door was wide open and he was counting stocks. When he finished, his notepad said 17 longs and only 2 shorts.  I just walked away slowly, knowing that a rally was likely NOT starting.

The Dean’s List is still very positive and the cockpit indicators are mostly positive. The consolidation pattern or Blade that the market will need to take it higher apars to need at least one more down leg to complete.  So I’m still waiting on the sidelines.

About now, you might be asking yourself, why wait? If we know it’s a consolidation pattern, why don’t we just buy now? Hmmm? Well, the answer is that we don’t know yet. The next wave down should give us a pretty good idea. However, IF the next leg down starts to exceed 1820, all bets are off for a significent move higher. This is why I’m waiting.

That’s what I’m doing.

h

BTW, as you probably observed, there are a lot of precious metal stocks and ETFs on the Lists now.  .Yeah, I see ‘em too, but I’m ignoring them for the time being. They don’t have patterns. The pattern is the second ingredient in the SIGN For me to buy a stock or ETF, it MUST be on one of my Lists, have a pattern and positive indicators. Right now, most of the metals are missing a pattern, or have a sloppy pattern.

If I get a chance tomorrow, I’ll talk more about the metals and Bonds.  I’m still not excited about either, but I want to go over some of the things I’m starting to see,  so when the time comes, especially for Bonds, you’ll be prepared.