Professor’s Comments November 7, 2013

Posted by OMS  at November 7th, 2013

The Dow rose 129 points to a new al- time high, closing at 15,746.  Volume was moderate, coming in at 96 percent of its 10 day average.  There were 176 new highs and 26 new lows.  The number of new lows was actually twice what we saw yesterday.  When I saw this, thinking it was strange, I started to look further.

That’s when I noticed that even though the Dow was up 129 points, the NASDAQ100 (QQQ) actually fell 0.02 points. The broader OTC market fell 7.91 points!!!  And the SPX, the market I have been watching because of its near perfect Ending Diagonal Pattern, did not come close to breaking the high it made last week.  It closed at 1773.

The other strange thing that happened was that the A-D oscillator actually fell about 10 points yesterday.  So not only did all of my breadth indicators remain negative, one of them, the A-D oscillator, was telling me that breadth was weakening and that a Big Move was coming within the next 1-2 days.  When the A-D oscillator is negative, it means that more stocks on the NYSE are in downtrends than Uptrends!

Yesterday was also the first day in weeks that we didn’t see the Trannies support the Dow.  It was surprising to see IYT, the Transportation iShares ETF and CSX, our local railroad, down 0.88 and 0.21 cents respectively.  It’s not the small drop that’s concerns me.  What concerns me is the fact that the Trannies fell on a Big up day for the Dow.  On the other hand, most of the utilities I follow, including Con ED had a positive day, with ED gaining 0.47 cents.

XLU, the Select Sector SPDR Utility ETF has been forming a rather strange looking Hockey Stick Pattern for the past year.  Since its low last November, the ETF rallied for an 8 point stick into late April, before pulling back to develop its Blade into early October.  The ETF has rallied about 2 points since then, and should have another 6 to go before the pattern completes.  I’m not too concerned about trading utilities at this point, but seeing the pattern develop on XLU makes me feel very comfortable with my position in ED.

Nevertheless, when I step back and look at all of the above information, while I believe the momentum will push the markets higher into year’s end, I still believe that we are very close to a near term top.

The way the market acted yesterday tells me that that we need to be very careful.  Whenever I see something like what happened yesterday, it’s usually a sign that something is wrong.  With the Dow up Big and the rest of the markets trading flat to down, it’s usually a sign of a tired market.  So odds are that the market will either trade sideways to down during the next 1-2 weeks.

Bottom Line:  I’m still not in any hurry to buy stocks.

But given that we had a small change in the A-D oscillator, I will be looking for a few scalp shorting opportunities within the next 1-2 days.  One of my favorite shorts at times like this is Whole Foods Market, WFM.  Last week, WFM reached a high of 65.59.  Three days later it pulled back to 62.68 to develop about a 3 point stick.  Since that time, a small negative blade has formed at the 64.72 level.

All I plan to do is watch WFM on the 60s.  If the PT indicators start to turn RED, I’ll short a few shares.  Nothing big, just enough to pay me in case the Big Move predicted by the A-D oscillator turns out to be down.

Remember, all I’m doing now is waiting. I’m still mostly in a cash position waiting for a better opportunity to buy shares for the final run up I see coming into year’s end.  But if I can get paid while I’m waiting with a few scalps, I’ll take the trades.

That’s what I’m doing,

h

BTW, please don’t ignore what happened yesterday.  It was a very strange trading day to say the least.  And when strange things start to happen, especially when breadth is involved, you need to pay attention.  I’m just telling you to be careful.

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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