Professor’s Comments January 9, 2014

Posted by OMS  at January 9th, 2014

The markets were mixed yesterday.  The Dow fell 68 points, closing at 16,462, while the broader SPX closed almost unchanged after hitting a low of 1831.  Volume was heavy, coming in at 140 percent of its 10 day average. There were 159 new highs and only 17 new lows.

It appears that yesterday’s pullback was either all or part of the third wave of the a-b-c consolidation pattern I discussed yesterday. So from a wave count perspective, the pattern is either complete, or the first down leg of a larger A-B-C pattern is complete. If it’s the latter, then the markets should rally in the days ahead, but not exceed the recent high of 1845.  If the SPX exceeds 1845, the odds increase significantly that the next rally leg of wave “e” up is underway.

Yesterday’s high volume, mixed trading day was interesting from another perspective.  After watching the Dow drop over 100 points at one point, I fully expected The Professor to be sleeping when I checked in with him last night.  He wasn’t!  He was wide awake highlighting 26 stocks as longs.  He also had 11 shorts.  If you recall, yesterday he had 17 longs and only 2 shorts,  so even with the Dow dropping over 100 points intraday, he was increasing the number of stocks that were entering an uptrend.  This interesting development is something that doesn’t happen often. It tells me not to get too negative on this market.

Here’s the thing.  While the Professor has still not triggered a Buy Signal, he’s not anywhere near triggering a Sell Signal.  And as long as the SPX stays between 1820 and 1845, the odds remain high that the current consolidation pattern will have a Bullish resolution.  Consolidation areas that form Hockey Sticks are basically continuation patterns. If prices enter the consolidation area on the rise, they tend to leave the area by rising.  Consolidation patterns are NOT topping patterns.

So with a positive Dean’s List and a Professor who is wide awake and starting to highlight a bunch of longs, I have to remain positive.  However, I still feel that it’s a bit too early to enter the long side.  I want to see one of two things happen.

I need to see the SPX break out of the consolidation area and start to exceed 1845.  If this happens, then it’s likely that the next up leg of wave “e” is underway.

The second thing I would like to see is confirmation by The Professor.  If he starts to highlight more than 50 stocks, I’m a buyer.

The December jobs report will be released tomorrow at 8:30am.  And as we’ve seen in the past, the volatility will likely increase as traders react to the jobs number.  If the number is interpreted as positive, then the past week of sideways trading should be enough to propel the market higher.  If the interpretation is negative, we’ll have to watch the 1820 area very closely to see if it holds.  IF it does, then it’s likely that the markets are forming the larger A-B-C pattern I talked about earlier.

Anyhow, I’m still on the sidelines.  If the market starts off positive today, I will be running The Professor starting about 11am when the algorithm has enough data to work with.  If the number of longs starts to exceed 50, I’ll let you know.  I’ll also run Emeritus to see if he is highlighting any stocks that look interesting.  As you know, when The Professor starts to tell me that an overall Uptrend is starting, I use Emeritus to tell me which stocks from the Member’s Watch List are starting to trend.  The combination can be a very powerful tool.

Yesterday, I mentioned that I would talk about Bonds and the metals today.  However because this is starting to get lengthy, I’m only going to address Bonds.  The metals can wait. I really don’t see anything interesting happening with them yet. So with Bonds, if you recall, several months ago, when the long bond was trading between 145 -147, I said Bonds could drop to the 126-127 level.  And that’s pretty much what happened.

In the process of falling, TMF, the 20+ year bond ETF, formed a TLB pattern.  It’s still too early to establish a Basic Position in the ETF, but IF the PT indicators turn positive in the days ahead, it could be considered as a trade.

The ETF is on the Dean’s List, so it currently meets 2 of the 3 requirements of The SIGN.  All it needs now is for the PT indicators to turn positive.  This could happen during the next few days, especially with the December jobs report coming out tomorrow.

TMF is a 3X ETF and as such it can be very volatile.  I mention this because for the past 5 months, the ETF has traded in a very unusual narrow range.  This has caused the Bollinger Bands to become extremely narrow.  And as we know from Class, when the Bands start to narrow, the move coming off the tight Bands can be EXPLOSIVE.  It’s what I refer to as “squeezing the toothpaste”.

So here’s what I plan to do.  If the PT indicators turn positive on the Daily chart, I will be buying a half position in TMF.  Remember, because the ETF is still in a downtrend, this will only be a trade.  Then once the trade is established, I will stay in the trade as long as the indicators remain positive.  If the indicators turn negative, I will exit the trade.

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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