Professor’s Comments October 11, 2013
Posted by OMS at October 11th, 2013
The Dow skyrocketed 321 points higher on hopes that an agreement on the debt ceiling would be reached. However at the end of the day, no agreement came out of Washington, but at least both sides were talking. This enabled the Dow to close on its high of 15,125.
After noting two days of EXTREME oversold conditions from the A-D oscillator, the rally was expected. The really was also helped by the ‘relatively’ small change in the A-D oscillator.
Volume on the rally was moderate, coming in at 107 percent of its 10 day average. There were 113 new highs and 24 new lows.
Like I said yesterday when I talked about a potential rally, the question that remains is ‘Was yesterday’s Big Move the start of Major Wave D up, or will we start down again if an agreement is not reached?’ I believe it’s the former, however, it’s still a bit too early to tell. That’s because even with yesterday’s strong rally, the DMI on the Dow (DIA) and NASDAQ (QQQ) are still negative.
Also, while the A-D oscillator rose from its EXTREME oversold conditions, it still came in with a negative reading of -40.27. The Summation Index also remains negative. So we’re not out of the woods yet.
The big positive for the day was The Professor, as he highlighted over 100 stocks as entering the trend mode. However as we have seen before, while it’s nice to see him active again, I usually like to see him become active after a DMI turn. But right now, the DMIs are still negative, so there is nothing to confirm.
However I should note that some of the biggest rallies I have seen started with The Professor becoming active just prior to the actual DMI turn. We saw this back in September 2011 and again in December 2011, when he started to highlight an extraordinary number of stocks as entering the trend mode. So by highlighting over 100 yesterday, he could be telling us that the Wave D rally is underway. We’ll see.
The Dean’s List turned positive yesterday, with all of the positive index ETFs making an appearance. So the Dean is on board for a rally.
I received an interesting question yesterday from a student askning about how to play the rally. And as you know I normally don’t answer these type of individual questions. However after thinking about it, I thought I would talk about it today. My student saw that most of the market indicators were negative, but also knew from my comments that the market was oversold and likely near a bottom. He wondered if he should buy under these conditions or wait until the indicators turned positive.
Hmmm? Good question. Unfortunately, I don’t really have a good answer for it. The problem lies with the indicators. They lag. Most indicators usually only tell you what has happened, not what is going to happen. So IF you only follow the indicators, you usually give up some of the move. There’s not much that you can do about this, because the alternative is that IF you buy early, and the rally is not the start of the major move, then you’re stuck holding a lot of stock with negative indicators.
This is why I use and discuss Patterns in my Comments. Patterns give you some idea as to where an index or a stock should bottom. For example, during the past few weeks, I have been talking about the S&P bottoming near the 1660-1665 level on Wave D down. The SPX actually got as low as 1647.47, and when it did, I talked about how oversold it had become and how the ‘small change’ would likely produce a rally. And as we saw yesterday, this is exactly what happened.
If you entered yesterday with this knowledge, you could have taken a few positions early, and then exited the positions later in the day. That way you would be out of the market and not have to worry about the negative DMIs on the Dow and QQQ. But most students don’t want to do this. They want to follow indicators and use them to tell them when to enter or exit the market. This is OK, but again, because the indicators lag, you will never be able to capture all of the gain in a move. Same for getting out of a position. You will never get out at the very top.
But think about it. Let’s suppose that the current move is really the start of Major Wave E Up. If it is, the next move up should take the Dow well above the 16,000 level, possibly to just under 17,000. So even if you give up 300 points on the start of the rally and another 200 near the end, you’re still looking at capturing between 500 and 1500 Dow points. That’s anywhere between 3 and 10 percent, just based on the Dow. Individual stocks from the MWL should do much better,
If you want more gain, then you have to take more risk, and look to buy a few stocks when they become oversold. You need to pay more attention to the Patterns and indicators like the A-D oscillator. The A-D oscillator will tell you when stocks are oversold, or ‘On-Sale’, and when used with a pattern, can be very effective at identifying bargains. But many times, like yesterday, you will have to ignore the DMIs on the indexes, which will usually be negative.
This is why I use the Member’s Watch List under these conditions. The List always tells me which stocks are strong. Even when the overall market is correcting, many stocks on the MWL remained strong and in nice Patterns. So on a day like yesterday, when I saw two days of EXTREME oversold conditions going into the day, and a ‘relatively’ small change in the A-D oscillator on the board, I was looking for the possibility of a Big Move. I had been saying that I believed that the market would trade significantly higher once the ‘cloud’ over the shutdown and debt ceiling was removed, and then when a ray of hope in Washington appeared, we saw what happened. The market exploded higher.
Just about all for the stocks on the Member’s Watch List had a really nice day. They should have. They were among the strongest stocks going into yesterday, and when the market started to rally, they led the way. Some of them had one or more PT indicators that were negative, but that’s OK. If the indicators had been positive for the past few weeks and one or two turned negative recently, that’s OK…As long as all three of the indictors were not negative, for the purpose of the MWL, they’re still positive. And stocks with positive indicators, that have well defined Patterns can be purchased when they are ‘On Sale’. You can always drop down and use the 60s for this purpose.
Again, like I always say, trading is an odds game. And sometimes when you want to increase your gain, you need to take more risk. You have to buy when conditions are not optimal; when all of the indicators are not lined-up. That’s why I try to tell you when the market is overbought or oversold. Or when a Big Move is likely. By knowing these things, it is not a guarantee that you’re going to make money on the trade. It only increases your chance of success.
But you should understand that while I sometimes buy a few shares when the market is overbought or oversold, the bulk of my money is always committed after I see ALL of the indicators lined up. I have found that to do otherwise is foolish. I ALWAYS like to be on the right side of the indicators, and am willing to accept a slightly lower return on the Major Move.
The way I figure it is IF I can get several moves of 10 percent or more during the year, pretty soon I’m looking at a nice yearly return. Like this year, where we’ve already seen the Dow make moves that totaled over 4,000 points on the upside. I don’t have to get all 4,000 Dow points to have a successful year. Again, that’s why I follow the DMI with most of my money and don’t worry about capturing every last cent in a trade.
That’s what I’m doing,
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Category: Professor's Comments