Professor’s Comments November 1, 2013

Posted by OMS  at November 1st, 2013

The Dow fell 65 points, closing at 15,553.  Volume was moderate, coming in at 107 of its 10 day average.  There were 140 new highs and 26 new lows.

Yesterday’s decline was likely the result of follow through from the small change in Tuesday’s A-D oscillator.  The decline did not change the color of the cockpit indicators.  However it did check the upward advance of all of my breadth indicators.  For the first time since 11 October, the A-D oscillator, Summation Index, Hi-Lo indicator  and Up-Down oscillator are all negative.

So now, with turning breadth indicators, and likely near the top of one of the final waves of Ending Diagonal Pattern, I find myself in the twilight zone.

As I mentioned previously, I thought the markets would have a positive bias going into month’s end.  But once November begins, the positive bias will no longer be there to support the markets and the larger pattern should start to take over.  My indicators were telling me that it too late to buy stocks, and still too early to start shorting aggressively.

So what to do?  As a trader, I still wanted to get paid for the day, but how?  Hmmm?

What I do at times like this is trade as if I were in a consolidation period.  I shorten up on the time periods, trade smaller positions, and take profits quickly. In other words, I scalp!

I picked a stock with a high P/E (43) and a relatively low beta (66).  The reason for this is because being in the transition zone, I wanted a slow, but steady mover, just in case I was wrong. 

So I continued to short Whole Foods Market, WFM, on the 60s.  Yesterday I mentioned that I started playing with WFM when it turned negative on the 60s.     

Yesterday the stock opened at 63.64 and proceeded to drop almost a point to 62.68 where the 2-period RSI Wilder became oversold.  I covered the shares I was holding from the previous day, and moved to the sidelines.  Then I waited. 

All I was doing was watching the PT indicators, and waiting for a small rally to push the 2-period RSI Wilder back into overbought territory.  As long as the PT indicators remained negative, I planned to short the stock again as soon as the 2-Period RSI gave say so..

That opportunity came during the 1300 hour, when WFM hit a high of 63.81.  Once again I started shorting the stock, and simply waited for it to become oversold again.

The stock closed at 63.13, but I exited the position slightly above that level for a 60 cent profit.

I mention this trade today because stocks are not in trends all the time.  Sometimes they are pulling back from overbought conditions.  Sometimes they are just trading sideways, forming Blades for the next move up.  And sometimes they could be getting ready to change direction.  When I believe that one of these conditions is occurring, I pull in my horns and scalp.

The key to a trade like this is the CCI.  When I see negative PT indicators and a negative CCI, (below the zero line), I’m not a bit concerned about the stock going into an Uptrend.  So every time I see the 2-period RSI move into overbought territory, I start looking to short the stock.

It’s not a trading style that I want to make a steady diet of, but when the market isn’t doing anything, it pays the bills.

BTW, a slow, steady mover like WFM would have provided a nice Rifle Trade as it was moving up. Note how it completed its HS Pattern on 9 October, with an oversold RSI. But now that the stock has hit it’s target from the HS Pattern, and appears to have also completed a THT Pattern, I’m just watching for it to turn negative on the Daily’s. Meanwhile I’m scalping the 60s.

I was also watching AAPL and China Pete, SNP, yesterday..  It was nice to see AAPL only pull back only slightly during the early morning market sell-off.  Remember I’m looking for a Blade to develop in the near term, so it can start moving higher.  I just want to see the stock get closer to the moving average.  Nothing drastic.

China Pete, another one of my turn around candidates,  gained another point yesterday and now has 2 of its 3 PT indicators positive.  The only hold out is the MACD.  The P-volume is at its highest level in months, and the 35 period CCI is almost ready to enter the trend mode.  The past three days of trading have pulled the 50 to within a point of the 200.

The reason I’m watching these stocks now is because at this point I’m really NOT seeing institutional money leave the markets.  What appears to be happening is part of the normal rotation process, as money leaves overpriced stocks (stocks that hit their targets), and moves into stocks that offer better potential.  This is what causes stocks like AAPL to turn around, moving from down trends into up trends.

It’s why I’m just watching and scalping now.

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.