Professor’s Comments November 8, 2013

Posted by OMS  at November 8th, 2013

One day after the Dow gained 129 points to a new all-time high, it fell 151 points to 15,594.  Volume was heavy on the decline, coming in at 115 percent of its 10 day average.  There were 176 new highs and 26 new lows.  Declining issues also swamped advancers 2411 to 687.  The decline caused a very negative ‘Enveloping Candlestick Pattern’ to form on the Dow.  It appears that the interim top that I have been expecting has arrived.

Yesterday I said that the market was acting very strange and that the A-D oscillator was suggesting that we could see a Big Move within 1-2 days.  Turns out the Big Move was 151 points to the downside.

That’s why I pay a lot of attention to the A-D oscillator.  Yesterday, even though the Dow gained 129 points, our breadth indicators and the A-D oscillator were telling us that most stocks were starting down trends. 

A few days ago, I said that I would like to buy AAPL a little close to its moving averages.  Now after dropping over 8 points yesterday, it’s only 12 points from the 50.  I’m patient.

Same for Whole Foods Market.  Yesterday I mentioned that I would be shorting the stock IF it turned Red on the 60s based on the pattern.  Unfortunately, the stock opened down over 6 points from Wednesday’s close, which didn’t give me an opportunity to short the stock yesterday.  I actually was holding a few shares short because of what I saw a few weeks ago when I talked about WFM in response to stocks that you sent in for the Update Class. But even though the trade didn’t set up on the 60s as I expected, there is a lesson here anyway.  WFM was a stock that was grossly overpriced with a P/E over 40.  If you recall, I said that WFM was the type of stock that I love to short.  Then after I made these comments, WFM went on to form an inverse Hockey Stick Pattern that usually leads to lower prices.  Yeah all of the PT indicators were not negative prior to the decline.  But one of them was. The P-volume turned negative a week ago.  There was obviously something wrong with this stock that was making new highs.

Then the company announced its 4the quarter results with the following headline:

Whole Foods Market Reports Record Fourth Quarter and Fiscal Year Results

Company Opens a Record 12 Stores, Delivers $0.32 in Earnings per Share, and Revises Outlook for Fiscal Year 2014; Company Announces a 20% Increase in Quarterly Dividend and Additional Share Repurchase Authorization of $500 Million

The company went on to say “We reported record fourth quarter operating results which contributed to the best fiscal year performance in our Company’s 35-year history.”

Wow!!  What more can you expect of a stock?  Absolutely great results AND plans to buy back $500M of stock.   Yet WFM drops 7.21 points to 57.26!!!!  Hmmm?  I guess most traders were paying too much attention to the hype and didn’t see the negative Hockey Stick pattern that was developing.  Like I say in Class, never pay attention to what a company says. NEVER!   Pay attention to the patterns.  If towards year’s end, you start to see a negative pattern developing in your stocks and then see the P-volume start to fall off, please remember what happened to WFM.

For the past few days, I have also been saying that I’m in no hurry to buy stocks.  I still feel that way.  Right now, I’m less than 30 percent invested.  My largest position is in ED, which I plan to add to IF it continues to pull the 50 up to the 200.  I love the fact that the P-volume is showing positive divergence.

Yesterday, the Professor only had 9 longs and 14 shorts.  So his bias is still negative, but he doesn’t see a major downtrend developing yet.  As long as The Professor doesn’t start to highlight more than 50 stocks as shorts, I believe the pullback will only be temporary.  Maybe another week or two.

Emeritus has also been very quiet recently and is not highlighting any stocks for the Honor Roll.  So as long as these two algorithms remain silent, I’m willing to let things run their course.  I still believe that the S&P has a good chance to trade down to the 1700 level on this leg down.  Yesterday the SPX lost 23 points to close at 1747.  If the S&P does drop to the 1700 level, that’s about 375 Dow points from current levels.  And that’s why I’m not in any hurry to buy this market.

Yesterday, I received an email from Tom Y. saying he believes that FXP is now a buy.  He cited the TLB and pattern and the DMI turn.  With the ETF trading at 17.42, he put the target at 21.42.  Tom also mentioned that he plans to buy his basic position soon, but will try to buy it on sale.  Hmmm?  I tend to agree with Tom’s analysis, except for the part about the ‘Basic Position’…  When I look at FXP, I see it as more of a trade.  I only take ‘Basic Positions’ AFTER I see the 50 move above the 200 and the stock actually moves into an Uptrend.  And right now, the 50 is still way too far below the 200 for me to even think about a Basic Position.  However, after the TLB pattern and the DMI turn, FXP could be a lot of fun to dance with.  But IF the music stops, and her PT indicators turned negative, the dance would be over.

Tom also added “The Dean’s List is remarkable.”  Thanks Tom!

I probably won’t be posting a WSR this weekend.  I’ll be traveling and spending time with friends.  However IF something changes today and I feel that an Update is necessary, I’ll post a few Comments later today or before the market opens on Monday.  But like I said above, right now I’m not in any hurry to buy stocks.

Waiting and watching.

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

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