Professor’s Comments October 17, 2013

Posted by OMS  at October 17th, 2013

The Dow rallied for 207 points, closing at 15,373.   Volume was heavy, coming in at 117 of its 10 day average.  The pick-up in volume is a good sign, as it projects even higher prices for the near term.  There were 271 new highs and 47 new lows.

Congress finally reached a deal last night that would re-open the government just hours before the debt ceiling deadline.  The plan would fund the government through 15 January and raise the debt ceiling limit through 7 February  The agreement doesn’t solve any of the real issues facing our government.  It simply kicks the can a little further down the road. 

What the agreement does do is set-up the possibility of yet another government ‘cloud’ developing early next year.  By now, you should be very familiar with government generated clouds, and how they impacted the markets during the fiscal crisis, the sequester, and more recently the shutdown/debt ceiling crisis.  So keep this is mind as next year approaches. 

Yesterday’s rally didn’t do anything to alter or change the current pattern, which appears to be the initial wave of Wave E up.   So far we’re up about 650 Dow points since Wave E began.  Several days ago, I mentioned that we could see 1725 to 1730 on the SPX on this leg up.  Yesterday the SPX got as high as 1721.76.  It closed at 1721.54, so we’re getting close to my targets. 

One of the things that surprised me with yesterday’s rally was the A-D oscillator reading.  You would think that after a 200 point rally, the oscillator would be extremely overbought. But the oscillator finished the day with a relatively neutral reading of 59.19.  This tells me the current rally leg could push even higher, supporting my S&P targets.  All of my other breadth indicators are now positive and rising which also support a continuation of the rally.

The one thing that does trouble me is the fact that the P-volume on both the DIA and QQQ are now showing significant divergence.  You might want to  take a quick look at this divergence if you get a chance.  It’s classic!  So even though everything is positive for now, our most important volume measure is starting to warn.  Right now, it’s still positive.  But IF this indicator starts to turn negative in the weeks ahead, I will start to take a good portion of my money off the table.

The Dean’s List remains positive with many ETFs showing increasing relative strength.  The Dean has been telling is to get involved with energy issues, and yesterday we saw SLB pop 1.84 to over 92, and HAL rise 0.81 to 51.97.

BTW, several weeks ago, when SLB was developing the Blade of its Hockey Stick Pattern near 80, I mentioned that it had a target in the mid-90s.  So yesterday, we saw the stock move over 92.  In other words, it’s starting to approach its target.  I mention this today to remind you that no stock, no matter how good, goes to heaven.  Stocks go to targets, and now even our energy darling SLB, is starting to get long in the tooth.  You might want to remember this if the S&P starts to move above 1730 in the days ahead. 

Bottom Line:   It appears the markets will likely chop higher in th weeks ahead, with the key word being ‘chop’.  After rising over 600 points off the 9 October bottom, the Dow might need to rest near current levels before making it’s next thrust higher.   All I’ll be doing for the next few days (weeks?), is riding the horse.  If we get above 1730, I’ll start looking to manage some money.  But for now, I’m just riding.

I believe that once this current rally leg completes, the markets could see a significant pullback, possibly to the 1680 level, before the final waves of the rally start to develop.  I’ll wait for that pullback before I do any additional buying.

That’s what I’m doing.

h

BTW, it felt great to be back in the Classroom last night. I’ll be getting even more ‘therapy’ by doing the ‘Trading the Waves’ webinar for AIQ Systems later today.

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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