Professor’s Comments May 1, 2015

Posted by OMS  at May 1st, 2015

The Dow fell 195 points, closing at 17,841. Volume on the decline was heavy, coming in at 123 percent of its 10-day average.  There were 44 new highs and 58 new lows.

Yesterday’s decline caused The Tide to turn negative.  So now I can start looking for inverse ETFs to appear on the Dean’s List.  Right now, 3 of the 4 positive index ETFs are still on the List, so it I will need to wait a bit more before starting to short the Dow, NASDAQ and S&P500.  If you recall from my past Classes, I showed you how this same situation happened several times in the past.  Most times, The Tide turns on the same day that the Dean’s List turns, enabling us to start trading index ETFs from the List immediately.  But sometimes, we had to wait a few days before all of the index ETFs appeared on the List.  This appears to be the case now, as the only inverse ETF on the List is TWM, the inverse ETF for the Russell 2000.   So I’m still waiting for DXD, QID and SDS to appear on the List before buying.  The thing I want to point out to you his morning is that in just about every case I looked at, whether the List turned at the same time as the Tide or if you had to wait a few days before taking positions, the results were worth the wait.

On the other hand, with TWM now on the Dean’s List, and a negative Tide,  I can now start to add to my ‘trial’ position in DXDs by adding shares of the inverse ETF for the Russell 2K.  All of the PT indicators for TWM have turned positive now, and the Coach is also positive.  So today I will be looking to buy shares of TWM using the 30s.  If the PT indicators on the 30s are negative at the open this morning, I will remain on the sidelines.  However as soon as they turn positive, I’m a buyer.

Again, I’m going to follow the rules for my primary strategy for trading ETFs. 

For those of you have forgotten this strategy, I simple wait for The Tide to change direction.  Once this happens, I start looking for inverse index ETFs to appear on the Dean’s List.  Like I said above, sometimes the inverse ETFs appear immediately and sometimes it takes a few days.  But with a negative Tide change and the Dean telling me that the Russell 2K is now the weakest index, that’s where I’m going to start.

As for position sizing, assuming the down turn that I expect in the overall market is starting,  I plan to have about 60-70 percent of my trading portfolio invested in inverse index ETFs.  The rest will be in short stocks, gold, currencies or bonds, depending on which type of ETF the Dean is saying is the strongest.  For example, if he says the be short bonds, I’ll be in TBT.  If TBT falls off the List, and TMF or TLT appears, I’ll buy the long bond ETFs.  It’s not complicated.

Same for my currency trades.  If UDN, the inverse dollar ETF, appears on the List, I’m short the dollar.  Then when UDN falls off the List, and UUP re-appears, I’m back long the Dollar.  It’s not complicated.

BTW, last night I received an email from John G. asking about buying or staying with energy stocks now that the overall market appears to be turning negative.  Here’s what I do, and it applies to any of the ‘Sticks in the Sand’ I use to trade energy, gold, bonds or currencies.  As long as a ‘Stick in the Sand’ for a particular sector is on the List, it tells me whether that sector is weak or strong.  So to answer John’s question, now that DIG is still on the List and near the top, it’s telling me that energy is still relatively strong.  And as long as the PT indicators on the energy stocks in that sector remain positive, I’ll remain in the stock.

By watching the ‘Sticks in the Sand’ I always know if the environment is favorable or unfavorable for a particular sector…even if the overall market turns ugly. 

It’s the same for gold, bonds, currencies and the international ETFs.

But let’s face it, today is the first day of May.  And history tells us that the best time to trade energy is the March-April time period.   So we need to keep a close eye on energy now.  If DUG reappears on the List, I’m out of energy.  That’s it!

One of the reasons that you need to pay attention to the ‘Sticks in the Sand’ for some of these ‘independent’ sectors, like energy, gold, bonds, and currencies has to do with rotation. 

Remember, when a particular Mutual Fund gets established, it must outline the rules its managers will follow as they operate the fund. The SEC requires the fund  to publish these rules in a prospectus.  And most funds say that they will keep about 95-96 percent of their money in stocks. The rest will be kept in cash or cash like vehicles.  This is pretty easy to do when the market us going up.  But it creates problems when the market is going down. 

When the market starts to head down, a lot of investors get nervous and start to ask the fund for their money.  When this becomes excessive, the fund must start to sell shares of the individual stocks in the funds portfolio.  When done in mass, this is what causes the overall market to decline.  But even before this starts to happen, a lot of managers anticipate that a decline is coming and start to move money into defensive sectors, like gold, bonds or consumer goods.  This rotation is picked up by The Dean’s List.  It’s why you need to pay attention to the ‘Sticks in the Sand’ for the individual sectors.  Just because the market could be ready to start a major decline, it doesn’t mean that there won’t be opportunities to buy stocks and ETFs in other sectors.  There will!  And the Dean will always tell you which sectors are the strongest and where to look for opportunities.  It’s what he does.

Anyhow, I hope I answered John’s question and cleared up the issue for the rest of you.

One other thing….if you looked at the cockpit indicators this morning, you will note that a new indicator has been added.  In the weeks ahead, I will talk more about how I use the Summation Index to identify and trade individual stocks.

But right now, with mixed signals coming from the cockpit and not a lot to trade on the Honor Roll, I’m going to watch the 30s on TWM.  As long as the cockpit indicators remain mixed and the Dow remains above 17,620, there is still a chance for a rally.

I’m just being cautious and patient.

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

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.