Professor’s Comments November 22, 2013

Posted by OMS  at November 22nd, 2013

The Dow rose 109 points, closing over 16,000 for the first time.  It settled at 16,010.  The S&P also rallied for 14 points, but fell short of the high of 1802 it made last Monday.  It closed at 1795.  Volume was moderate, coming in at 101 percent of its 10 day average.  There were 157 new highs and 77 new lows.  Forget the fact that there were 157 new highs made yesterday.  The number of new highs is meaningless now. The more important number is the new lows which actually increased yesterday from 70 to 77.  You might want to pay attention to the number of new lows in the days ahead.

The thing I found interesting about yesterday’s trading is that while the market was pushing to new highs, the A-D oscillator was not.  It came in at a -28.23.  This too is very strange.  The indexes are setting record highs when most stocks on the NYSE are in downtrends.  The oscillator is telling us to be careful.  Hmmm?

Even with yesterday’s big pop, the breadth indicators remain negative.   So it is possible that the S&P topped last Monday at 1802 and yesterday’s trading action was just a large retracement rally.

I’ll still go with 1810 on upside for the S&P and 1740 to1700 on the downside.  The key remains the 1780 level.  As long as the S&P stays above that level, it’s likely the current rally will continue.  We’ll see.

I mostly watched from the sidelines yesterday.  I was surprised to see GMCR pop over 5 points at the open.  I continued to watch the stock as it moved higher and thought about a scalp short when I saw it trading up over 10 points.   I actually tried to short the stock when it turned negative on the 5s.  I put in an order, but it was kicked back immediately because there were no shares were available to borrow.  Hmmm?  The scalp trade would have produced a nice profit if it got executed.  Oh well.

It appears that yesterday’s pop in GMCR was a classic short squeeze.  A lot of traders had been short the stock, and panicked when the stock opened up 5 points higher.  They couldn’t cover fast enough, driving priced higher and higher.  GMCR is a good example of what can happen when all pieces of the pattern are not in place, and you try to anticipate. (in this case, the stock was still in an Uptrend).  You could get hammered!

One thing to note about GMCR is that the pattern that I highlighted yesterday is still in very much tact.  It just needs to do more work to get its 50 below the 200. But after not being to obtain shares to short yesterday, I will probably be looking for shorts elsewhere.

The real reason I’m mentioning GMCR this morning is because of the question I received from Mike N. yesterday.  If you recall, he asked about putting together a List of stocks that he wanted to short when the time came.  I talked about why I usually use ETFs on the short side vs. individual stocks.  Yesterday, GMCR was a good example of why.  Sometimes, actually many times, even though you want to short a particular stock, your broker can’t find the shares to borrow.  The trading action between buyers and sellers can become so intense, that brokers can’t keep pace with the action.  You get shout out.  All that research you did looking for patterns, monitoring indicators, etc., goes out the window.  The broker can’t find the shares to short.

This is one reason that I prefer broad based inverse index ETFs when I start to get serious about the short side.  They are always available to buy long, and if something crazy happens to an individual stock, like what happened to GMCR yesterday, you don’t get clobbered.  It’s just something to think about.

One of the stocks that did behave well yesterday was Target, TGT.  The stock completed its THT Pattern in early August and then went on to performed a negative Rope Jump and develop its Blade into yesterday.  The stock was in a downtrend.  When its earnings were announced, the stock fell 2.29 points to 64.19.  The stock is now a classic Turn Around short once the MACD turns negative, providing you can find the shares :>)

The other stock that got hammered yesterday was Gamestop, GME.  It fell 3.64 points to 48.8.  It was only last weekend that I wrote about GME and the need for caution.  At the time, GME was trading at 57.59.  It got as low as 46.66 yesterday.  The PT indicators have now turned negative after a THT Pattern.

I’ll say it again.  This is not the time to be playing with overpriced ‘concept’ stocks.  And right now, a lot of stocks are starting to look just like GME.  You’re not seeing it because the cheerleaders on CNBC and FOX Business news are all talking about record highs on the Dow.  But all their hype does not change the fact that the A-D oscillator and my other breadth indicators remain negative.

Hearing about record highs does not mean anything to you if you own a stock like Target or Gamestop.  All you know is that you lost money and it hurts!

I’m still mostly on the sidelines.

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.