Professor’s Comments November 19, 2013

Posted by OMS  at November 19th, 2013

 The Dow rallied early breaking the 16,000 level and then retracing to finish up 13 points at 15,974.  The SPX and NASDAQ both finished down 6 and 36 points respectively.  Volume was moderate, coming in at 96 percent of its 10 day average.  There were 284 new highs and only 19 new lows.

I want to talk about two things this morning now that the Dow and S&P have reached my interim upside targets. It’s now time to talk about risk vs. reward.   Contrary to what some of the folks on CNBC are reporting, I do not believe that this market is going to the moon.  Looking at the charts, I believe that the upside is probably limited to about 1810 on the S&P before a major correction starts to take hold.  If the S&P moves below the 1780 level, it will likely trade back down to 1740, with 1700 possible.  So right now with the S&P trading at 1791, I see a potential reward of about 20 points to the upside vs.50 to 90 points downside risk.  In other words, the risk-reward is anywhere from 2:1/2 – 4 : 1 against.  I don’t like those odds.

Yesterday, even though the Dow was making new all-time highs, the A-D oscillator slipped back into negative territory with a reading of -6.91. The P-volume is also diverging negatively.  This is NOT what you would expect to see in a market making new highs. 

However, the Dean’s List and the cockpit indicators are still positive, so I will remain positive for the moment.  I still believe, with a few exceptions, that this is not the time to be buying stocks. 

Right now, there is a lot of rotation going on in the market.  The current rally is being supported by fewer and fewer stocks.  The institutions are clearly rolling out of recent winners and into stocks with better valuations.  In other words, this has now become a stock pickers market

During the past week, I have been highlighting several stocks in the refining sector as an example of what is taking place in the market.  Old favorites like SLB, have been stagnating for the past month after reaching their targets.   And new friends like Marathon Pete, MPC, Tesoro Pete, TSO, and  China Pete, SNP, have had some really nice pops.  SNP was up another 4.17 points yesterday to 89.89.  It is now up over 10 percent in the past 2 days.

And this is the other thing I want to talk about this morning.  Stocks like China Pete and Marathon.

As most of you know, I became interested in the refiners when they started showing up on the Member’s Watch List after a TLB Pattern and a Rope Jump.  That part you know.  And from your emails, I also know that many of you have been trading the refiners off their short term patterns and have been managing your money as the stocks popped higher.  But here’s the part that I’m not sure that you fully understand, and that’s why I want to go over it this morning.

The main reason I look for turn around candidates is because of the very nature of the pattern.  It suggests higher prices!  I’m not talking about the small 7 –10 point pops made by MPC and SNP, I’m talking about significantly larger moves.  Why?

Well it has to do with how the pattern developed.  We all know that a Rope Jump is the first indication that a stock could be in the process of reversing direction. The Rope Jump tells us the move is a possible wave 1.  After that we look for a pullback to form the Wave 2 Blade.  And while the Blade is forming, we look to see if the price of the stock is trading above the moving averages so it can pull the 50 back above the 200.  Again, most of you know this. 

However from your emails, I’m not sure that you really understand why you are trading and investing in these type of stocks.  Too many of you are focused on the short term profits from the initial pop.  I want you to focus on the longer term possibilities.

Here’s the thing:  We expect to see the initial pop!  The pop tells us that the impulse wave is starting.  That’s why I spend so much time trying to identify Wave 3s or impulse waves.  They are the sweet spot for traders.  And perhaps the easiest way I know to identify a Wave 3 is to spot a Rope Jump followed by a Wave 2 pullback after a TLB Pattern.  That’s why the Turn Around process is such an important part of the Professor’s Methodology.  It helps us identify Wave 3s.

OK, so now that you know why we look to trade this pattern, let’s review a few things from Class about the actual Wave 3 itself.

The first thing we know is that Wave 3s consist of five individual waves, with wave 3 of 3 being the sweet spot within the wave.  For something like Marathon, we’re not even close to being there yet.  I hope you realize this.  So far, all last week’s breakout did was tell us that the impulse wave was just beginning.  The move from 70 to 79 was likely just wave 1 of 5 in the sequence.  At some point, the stock should begin to pull back and form the Blade of another Hockey Stick Pattern.  It will be after this Blade forms that I will become extremely interested in the stock.  That’s because the next move up will likely be the sweet spot move, or wave 3 of 3 up.

Marathon is now in an uptrend.  Last week’s initial pop was likely caused by one or two Big Boys moving onto the playground.  In the weeks ahead, look for more and more Big Boys to become interested.  When the institutions start to roll out of their overbought stocks, they will be looking for stocks with better value.  And now that refiners like MPC are in Uptrends, they can start rolling into them.  Once this starts to happen, the retail investors will look to participate.  That’s how Wave 3s are started and get pushed higher.  Wave 3s are where I like to trade, especially with Rifle Trades.

So in the weeks ahead, I will be looking for opportunities to buy additional shares of stocks like MPC, TSO and SNP…..whenever they become oversold.

That’s what I’m doing,

h

BTW, ED has moved back above its 200 on nice P-volume. As long as it remains above 58, it will continue to pull the 50 up toward the 200. The PT indicators are Green.

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.