Professor’s Comments October 18, 2013

Posted by OMS  at October 18th, 2013

The Dow finished the day off 3 points closing at 15,369..  Volume was slightly heavier than normal, coming in at 107 of its 10 day average.  There were 328 new highs and only 22 new lows.

A good portion of yesterday’s decline in the Dow was due to two stocks; IBM which had a tough day dropping almost 12 points and Goldman Sacks, GS, which fell almost 4 points.  The better indicator of what happened yesterday was the broader SPX, which rose over 11 points to 1733.  If you recall, I have been saying that I expected the SPX to trade above 1725 –1730.  So we’re there now.

In other words, I will start taking a few bucks off the table today.   It’s time to do some money management.

As most of you know, I believe that money management or protecting profits is one of the most important aspects of trading.  And this is especially true when we appear to be in a pattern that will likely push higher eventually, but only after a series of corrections.  The moves within an Ending Diagonal do not go straight up.  They chop higher in waves.  And right now, I believe that we are approaching the top of the current wave in the sequence.  We’re at 1733 now.  There is a possibility that we could trade down to the 1660 level on the next leg down and still stay within the current pattern.  Those 73 S&P points translate into about 585 Dow points. So be careful. 

There’s another reason why money management is especially important in this environment.  With everything that is happening with our debt now, one of the credit agencies could (I’m not saying they will) downgrade US debt instruments,. This could cause the markets to fall 300-400 points overnight. The thing you need to understand is that yesterday’s agreement to raise the debt ceiling did nthing to change the fact that our government is still in debt up to its ears. Credit agencies, like Moodys, don’t care about what the government says about reducing debt. They want to see tangable actions taken that will actually reduce the debt. And yesterday’s agreement only opened the door for more spending. It did nthing to reduce debt. So the problem remains, and the risk of a downgrade remains high.

It’s important that you understand this risk.  Trading markets is all about risk management vs. potential reward.  There is always risk in the markets.  But when I see the markets moving toward and then achieving my target (SPX 1730), the risk remains, but the potential reward is diminished.

As I said a few days ago, it was one thing to be buying this market when the SPX was at 1646.  It’s quite another when it’s at 1733.

The other thing that has changed is the value of the A-D oscillator.  All during the run-up, the A-D oscillator was relatively tame.  But last night it came in with its first overbought reading of 150.38.  At this level, the markets could continue to push even higher, as it’s not unusual to see 2-3 days of A-D oscillator readings above 150.  However, after 3 days of readings above 150, the market usually corrects. We had the first one yesterday.

So to sum it up, the pattern suggests that we’re in an Ending Diagonal, which is basically a rising triangle. And from Class you know all about triangles and how they are made up of several up-down-up waves.  And having reached the target for one of those waves, and seeing an overbought A-D oscillator….like I said, it becomes a question of risk vs. reward.  .

Today, I’m going to start lightening up.  I have some really nice gains in most of my stocks now, and I want to protect those gains.  So I will be selling a few shares and holding the rest just in case the market pushes higher.  If it does, I will sell even more as the market pushes higher.

Remember, IF we are in an Ending Diagonal, the pattern suggests that we will see several pullbacks. The pattern does not suggest, not even remotely, that prices will shoot to the moon from here.  So odds are that I will have an opportunity to buy back a good chunk of my shares at lower prices in the near future. If I don’t, that’s OK too, I’ll still have a few shares working for me, but at a lower risk.

Speaking of prices, yesterday, I did a webinar with AIQ Systems on ‘Trading the Turns’.  I have to tell you that I really had a lot of fun doing it.  In the webinar, I used a slide to illustrate how Mako Surgical, MAKO, was identified by the Member’s Watch List, and moved from its downtrend to an uptrend after a TLB Pattern..  If you recall, MAKO was the stock that was # 2 on the MWL on 5 August, and shortly after that, almost doubled after being acquired. 

I had only planned to use the slide to show how MAKO turned around.  But an hour before I was to give the presentation, I started to look at some of the other stocks on the List.  OMG!   Just about everything I looked at was a big winner!  BIDU, SAM, TSLA, DECK, NFLX were all there near the top.  BIDU went from 133 to 160.  SAM from 213 to 250.  TSLA from 144 to 193.  They were all there!!!  I was surprised to see Seabridge Gold, SA, leading the List at a time when I was ignoring gold stocks.  But even SA, which was trading at 12.85 on 5 August, went on to hit a high of 17.23.  The results pretty much speak for themselves.

During the past few days, I have received many emails of thanks for the work I’ve been doing.  I want you to know that I really appreciate this feedback. It’s also nice to hear that so many of you have been using the MWL to trade and make money on your favorite stocks.  Like I said in yesterday’s webinar, we bake our bread fresh every day.  You never get a stale List from me.  Not like the expensive Lists from the other guys, who sell you something over a month old. And then when they send it to you, they never rank the stocks so you can see which ones are the strongest. Nope our List is fresh!  And it only ranks the stocks that you are interested in trading. That’s because it only contains stocks that you sent to me. It’s your List!

So again thank you for the feedback.  I’m happy to hear that so many of my students have done so well.  But now it’s no longer the time to be thinking about buying stocks from the Lists.  Now its time to be thinking about protecting some of those profits and managing money.

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.