Professor’s Comments November 21, 2013

Posted by OMS  at November 21st, 2013

The Dow fell 66 points, closing at 15,906.  The S&P (SPX) fell 6.5 points dropping to a low of 1777.93 before closing at 1781.77.  Volume was moderate on the decline, coming in at 96 percent of its 10 day average.  There were 76 new highs and 70 new lows.  So now the number of new lows is almost equal to the number of new highs.  My, how things have changes in just a few days.

It appears that the market is in a transition zone, moving from an uptrend to a downtrend.  At this point, all of my breadth indicators are negative.  The A-D oscillator came in with a pretty negative reading of -114.19.   And while the Dean’s List and all of the cockpit indicators remain positive,  the fact that market breadth is so negative tells me that this is NOT the time to be buying stocks.

The SPX actually traded below my key 1780 level yesterday.  If it closed below 1780, I would be talking about shorting the market today.  But it didn’t, so the markets are still in the transitional no mans land.  The market action during the next few days will be critical in determining the extent of the next major move.  Right now, if we break 1780, the pattern suggests a drop to 1740.  That’s about 300+ Dow points from current levels.  However if the Big Boys start to dump stocks and things start to turn ugly, we could trade down to 1700 or below.  That’s my real concern at this point.  On the other hand, IF we do see 1700 and things start to steady, it would help clarify the current pattern and suggest significantly higher prices once the pattern completes.

In other words, the pattern I’ve been talking about for the past few weeks is starting to unfold.  I’ve lightened upon my positions because of it, and have been very patient with my new buys.  I plan to keep the same approach for the next two weeks.  Like I said yesterday, trading is a risk-reward game, and right now I believe that there is a lot more downside risk than upside reward in the market.

All I’m doing now is looking for a few stocks to pay me while I wait things out.  For example, at the 1:30 mark on Tuesday, I mentioned that I was looking to buy DUST at 35.20.  The trade was based on the breakdown of gold prices below 1300 which points to 1150.  Yesterday, DUST popped 3.93 points to close at 39.04.  I got paid.

BTW, I do NOT consider something like DUST to be a long term trade.  Being a 3X short gold ETF, it is way to volatile for anything but a short term trade. 

I mention this today because several gold and silver stocks appeared on last night’s Honor Roll.  This means that the miners could be starting a downtrend.  Astute observers of the Honor Roll probably saw this a few days ago as first, SLV appeared, followed the next day by GLD.  When silver and gold ETFs start to appear on the Honor Roll, it’s a dead give away that something is happening with the miners.  When one gold stock appears on the Honor Roll, I note it.  But when a gold or silver ETF appears, it’s like one hundred stocks from the same sector appearing.  Remember, Emeritus is a trend algorithm and when he sees a sector ETFs starting to trend, I pay attention.

Along those same lines, I received an email from Mike N. yesterday.  Mike said, “Since you’ve demonstrated the power of the TLB pattern, I am trying to think through a methodology for playing shorts when this market turns.  I am thinking the Dean will highlight short ETFs as one strategy.  As far as MWL goes, I am assuming it will be slim pickings for stocks bucking the downtrend.

At some point, to build a short watch list, I plan to take the MWL and find THT patterns and wait for DMI turns, rope jumps and 50/200 crosses.

I am sure you have better methods and was wondering if you could start preparing us to take advantage of down trends in a future WSR?”

Here’s what I said in my response to Mike:

Thank you for your thoughtful email. You are correct that my Lists are not designed to identify short candidates.  This is because the vast majority of my subscribers are not comfortable trading the short side.  This is why I have several inverse ETFs on the Dean’s List, so when market turns, they can move into the broader inverse ETFs.

However while my Lists do not support the short side other than inverse ETFs, my algorithms do.  During the past week, Emeritus has identified SLV and GLD as shorts. 

To answer your specific question on being able to identify shorts from a THT Pattern, like we did with MPC, TSO, and SNP on the long side, I do maintain a List of weak stocks, but I just don’t post it.

Given that not many of my students are interested in shorts, what I plan to do is talk about a few of these shorts from my unpublished list, when the time comes.

Hope this helps.

BTW, this is why I posted the 1:30 Update highlighting DUST and RGLD.  I felt that the time to put on a few shorts had arrived.

Watching S&P 1780. If the market starts to break down, I’ll look for a few shorts.

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
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