Professor’s Comments October 31, 2013

Posted by OMS  at October 31st, 2013

The Dow fell 62 points, closing at 15,618.   Volume was slightly heavier than normal, coming in at 104 percent of its 10 day average.  There were 223 new highs and only 13 new lows.

Yesterday I talked about the positive bias going into the Fed Day and the positive end of month bias associated with mutual fund rebalancing.  I also said that things could change after the end of the Fed announcement.  And that’s pretty much what happened.

Even though the Fed said it would not be making any changes to their current stimulus program, traders became disappointed when the Fed didn’t say anything about extending the tapering into 2014.  In other words, the ‘juice’ could be pulled in December.   Heaven forbid!   Traders were almost certain that given last month’s ridiculously poor payroll data, the Fed would be pushing back their tapering program.  When they didn’t, the market reversed.   What happened yesterday is a good indication of just how dependent and vulnerable the market has become to the stimulus ‘juice’.  Now, the markets react negatively even when something is not mentioned.  Wow!

Gold dropped on the news.  As I have said so many times in my comments, at this point in the pattern, gold is completely dependent on the Fed’s QE4 stimulus program.  No juice, no rally.  It still appears that gold, the metal, needs one more leg down before the pattern completes.  Unfortunately, that leg down could take gold to the 1150 level.  Yesterday gold was trading near 1350.

The A-D oscillator fell back into ‘neutral ’ territory, with a reading of 24.  Last week,  we were seeing overbought readings in the 150s from this indicator.  Now it’s 24 and could be ready to turn negative.  If it does, it would be an indication that the current rally is complete and the next down leg is starting.

Yesterday’s 62 point drop came on the heels of a ‘relatively’ small change in the A-D oscillator.  But traders only had two hours to digest the Fed announcement and react.  Because of this, I would expect to see more negative follow through today.  And that follow through will be what I will be watching.  It could start to change the direction of my breadth indicators.

Recall too that neither Emeritus nor The Professor have been active recently.  This is something that happens at tops.  Emeritus has not highlighted a stock in over a week!  Same for The Professor.  Last night I stopped by his office only to see a sign on the door that said:  Go away: only 1 long and 2 shorts.   Hmmm?  Yeah, I get it that he’s  sleeping, but this was the first time in weeks that he’s even mentioned a short.   Recall the last time he started to rouse when the Dow was trading near 14,800.  He woke up and mentioned 28, then started to wave the flag when he highlighted over 100.  The rally was on, and the Dow gained over 800 points.

And once the market started to rally, he went back to sleep.  But yesterday, for the first time in weeks, those two shorts cause him to roll over.  It’s not much, but IF he starts to highlight a bunch of stocks on the short side, I’ll let you know.  The next down leg of the Ending Diagonal pattern could be starting.

Yesterday I started to short Whole Food Markets, WFM, on the 60s.  I’m just fooling with it now.  But I wanted to talk about it this morning, not as a short, but as a picture perfect Rifle Trade.  I believe it’s still way too early to get serious about the short side.  Here’s the thing:  While I was looking at WFM on the 60’s, one of the things I noticed about the stock was how it behaved since 9 October when the market was just starting to move up.  WFM was in an Uptrend, and had formed a small Hockey Stick that projected a target in the mid-60s.  The 2-period RSI Wilder became oversold on the Daily’s on 9 October.  At the 11am bar on 10 October, the 60s turned positive and stayed positive until 29 October when 2 of the 3 PT indicators started to turn negative.  Then yesterday, right out of the gate, all 3 of the PT indicators turned Red. That’s when I started to short a few shares.  I figured that any stock that behaves so well in an Uptrend deserves to be shorted when the indicators turn.  Besides, it’s not like I was going against my rules. There was a nice THT Pattern on the 60s.

The reason I’m telling you this morning is not because I believe WFM is a good short.  I simply don’t know at this point.  Most of the indicators I’m looking at on the Daily Chart are still Green, as they are for most stocks now.

But things could be changing.  We know that once we get past the end of October, the positive bias could change.  The patterns should start to take over.  And right now, there are a lot of stocks with THT patterns that are ripe for a pullback.  So take a look at your stocks.  Do they have THT patterns?  Have their PT indicators started to turn negative on the Daily’s?  If they haven’t, you might want to check the 60s.  That’s where you will see the first sign the first sign that things could be changing.

And that’s really why I’m watching stocks like WFM now.

If the next leg down is starting, it could take the S&P back down to the 1700 level.  That’s about 63 S&P points or about 500 Dow points from current levels.  For many of you who have been trading stocks from the MWL, that’s a lot of profit to give back.

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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