Posted by OMS at November 11th, 2013
After looking at Friday’s trading action, it appears the S&P could be forming a short term triangle as part of its current rally leg within the larger Ending Diagonal Pattern. Anytime I see big up days, followed by a big down day, which is followed by another up day, I have to think triangle. At least for the short term. And because triangles are consolidation patterns, prices usually leave the pattern the in the direction they entered the triangle, which in this case is up.
So because of what I saw Friday, I would expect the S&P to complete a small rally early this week, probably slightly above its recent high of 1775. After that I would expect it to trade down towards the 1700 level to complete wave “d” of the larger Pattern.
If this small rally occurs, I will be looking to short the S&P from near 1775. The SPX closed at 1770.61 on Friday. By a small rally, I’m thinking about 5-7 S&P points or about 40-60 Dow points.
On Friday, even though the Dow had a big move of 166 points, the A-D oscillator hardly changed its negative stance. It came in with a reading of -99.89. So despite Friday’s big rally, most stocks on the NYSE are still in downtrends. I still believe that before the market can rally to new highs later this year, it will need to pull back to complete wave “d” of the current pattern.
Two other indicators also concern me besides the negative A-D oscillator. These are the negative P-volume and the A-D line. Both are also showing significant negative divergence. I don’t see this as an immediate problem, however longer- term it could become a real issue.
Given that the upside appears to be limited after Friday’s action, I am in no hurry to buy stocks at this point, and will actually be looking for a few scalp shorts from slightly higher levels. For me to buy aggressively now, I would need to see the S&P closer to 1700. That’s where I’m currently looking for the year-end rally to start.
BTW, something else happened on Friday that you should be aware of. We actually got a snapshot of what could happen to bond prices IF the Fed starts to reduce its $85 Billion bond and mortgage program. TMF dropped almost 3.5 points in one day! Talk about running scared!
On Friday, I mentioned that I wasn’t too worried about the 204,000 new jobs reported by the BLS. As we saw by the market’s reaction, it too believes the number to be a pure fabrication. The more important number was the 720,000 people that the BLS said left the workforce. This number is off the charts high! And this is why I’m really not concerned about the Fed stopping its stimulus program anytime soon. They can’t! With so many people leaving the workforce now, I believe that any stoppage of stimulus would put the country into an immediate recession.
My only concern about stimulus is what I mentioned a few weeks ago about how China and the credit agencies could react to additional printing.
We saw how Bond Funds got whacked on Friday with just a mention of increased interest rates. And this was driven by a fudged employment number. Imagine what could happen if the increase in rates was real because of a credit down grade or a pullback in Bond purchases by the Chinese? The government wouldn’t have to worry about a shutdown due to a political debate. It will be shut down because it won’t have any money to operate because nobody is buying its Bonds! When you already owe $17 Trillion, you can’t continue to spend over $1.2 trillion/ year and expect other people to keep lending you money at low rates. At some point, the lender is going to ask for higher interest on the money, or he will stop lending. Like I said, what the Fed does with its stimulus program won’t matter. But for the time being it appears the juice will continue. And as long as it does, the markets will likely continue to push higher.
CORN made a nice move on Friday, rising 0.54 cents to 32.2. As you know I have been watching CORN because of its TLB Pattern. The key word here is ‘watching’; I’m not saying anything about buying …yet. The ETF has been in a downtrend in what seems like forever. But Friday’s pop produced a change in several of my key indicators. Also, both the MACD and the P-volume on CORN are now showing positive divergence. So this week, if and it’s a BIG IF, CORN starts to turn Green on the Daily’s, I might look to buy a few shares. If I do, these shares will only be considered a trade, as the 50 is still far below the 200, it could take weeks before it starts an Uptrend. But there’s no ignoring the TLB Pattern and the positive divergence :>)
Biadu.com, BIDU is another stock to watch this week. The stock recently completed a THT Pattern, with its PT indicators turning negative on Thursday. The stock got a nice 3.76 pop on Friday, back to the 151 level. However, with negative indicators and a relatively high P/E of 31, I would not be surprised to see BIDU trading closer to the 130 level in the near future. If you get a chance to look at a chart of BIDU, you will see several things that I talk about in my Methodology. The first thing to notice is how the stock moved to its high of just under 170 last week. Notice how it did it off the Hockey Stick Pattern it completed in early September. The 50 point stick formed back in July-August helped push it to the 170 level after the stock rested and formed its Blade. But now the stock is starting to look tired. BIDU had been leading the Member’s Watch List for several months. Now it’s off the List. The Dean has kissed it good-by. Like I said last week, there is a of rotation going on in the market now. The Big Boys are moving out of last summer’s darlings, and looking for new loves. We saw it happen last week with Whole Foods, WFM. Same for Green Mountain Coffee Growers, GMCR and others like Gulfport Energy, GPOR, last month. When a stock turns Red after a THT Pattern, it’s not the time to be brave. BIDU is now RED.
Like I always say, “No stock, no matter how good ever goes to heaven. They go to targets.” And once they reach their targets, if they turn Red, bad things start to happen. It’s not that these are bad stocks. No. It’s just that the Big Boys are rolling out of them, and taking profits. And once a stock is no longer in favor, the Big Boys look for new loves.
So take a look at your stocks this week. Are they starting to look like BIDU? If they are, maybe it’s time to take a few bucks off the table.
Maybe it’s time to roll into a few new ones. For example, several of the energy stocks are starting to look interesting. Marathon Petroleum, MPC, has developed a TLB Pattern recently. It ‘Jumped the Ropes’ in late October, and has been forming a Blade for the past few weeks. The 50 is very close to crossing the 200. The stock currently supports a 2 rating on the MWL. Hmmm?
Same for Tesoro Pete, TSO. BTW, China Pete, SNB, has pulled back from the overbought levels I mentioned last week. The 2-period RSI Wilder is now oversold making it a Rifle Trade on the 60s. Maybe the energy sector will be one of the places where the Big Boys will start looking for those new loves I talked about earlier.
That’s what I’m doing,
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