Weekend Strategy Review April 13, 2014

Posted by OMS  at April 13th, 2014

The Dow fell another 144 points on Friday, closing at 16,027.  It was down 386 points for the week.  The OTC market was down 54 points on Friday, closing at 4,000.  It was down 127 points for the week.  It was other tough week for technology and biotech.

As bad as the decline has been this week, it still appears that the markets are in the process of developing corrective waves that once complete, will help push markets to new highs.  The only issue I see at the moment is the part about ‘once complete’.

Where is the bleeding likely going to stop?  I’m going to say about 15,850 or so on the Dow.  So maybe another 150+ points from current levels.  At least that’s what the pattern says.   It appears that the ‘simple’ a-b-c correction that correction we have been watching for the past month has morphed into a 3-3-5 Flat.  And if I’m right about this pattern, we should be working on the final wave down of the 5 wave corrective sequence that began from the 6 March top.

There are several reasons why I believe the current pattern is corrective rather than the start of a new down trend.

The first has to do with all the overlapping waves in the pattern.  This is something that you don’t see when you start down trends. 

The second has to do with volume.  Volume so far has been extremely light on the decline, with only a few sectors like biotech and technology being hit hard.  If you owned energy stocks during this decline, you’re probably thinking ‘what decline?”  Gulfport Energy (GPOR) actually made a new high on Friday closing up 0.81 at 74.

The Dean’s List is negative, but it’s not extremely negative.  It appears that a lot of money that was in equities had started to flow into Bonds.  Several months back, when I was talking about TMF as a trade off its TLB Pattern, the stock was trading at 46 when the PT indicators turned Green.  Now it’s at 56.  On Friday, the 50 finally crossed above the 200, putting the stock into an Uptrend.  So is this the time to be Buying Bonds?

It wasn’t too long ago that the long bond was trading at 146-147.  Back then I felt it would trade down to the 126-127 level.  It got as low as 130, which is where I started talking about it again.  So now the long bond is at 134, with TMF at 56.  I haven’t changed my opinion at all about the long bond moving toward 150-160 during the next 1-2 years, and even higher into 2016.  I still believe that interest rates will remain low, and once equities top in a few months, money will start pouring into Bonds.  I look at the past few weeks as a confirmation of that feeling

But here’s the thing.  While I believe that Bonds, including TMF will go a lot higher over the next 2-3 years, I still believe that the better short term trading opportunity Is in equities.  Yeah, the chart of TMF is telling me that I should be establishing a full Basic Position in Bonds now that the 50 has crossed above the 200.  But I’m not ready to buy my full position in Bonds yet.  I want to see IF the Dow stabilizes as I expect during the next week or so.  If it does, I’ll use the rest of my money to buy a few more equities, especially IF The Professor gives say so.  IF equities start to rally, it’s likely that Bonds will be left behind.  The trade in TMF will still be there, but with a potential 1,500 point rally in the Dow staring me in the face, the bond trade will have to wait.  I’ll reassess the bond trade in a few weeks.  I don’t think bonds are going to the moon from here.

The other thing that happened on Friday was the VIX generated a set-up for a new Buy Signal by closing above its upper Bollinger Band.   So If the markets starts to move higher next week, the VIX will generate a new Buy Signal.  Just remember that while a VIX Buy Signal is usually very reliable, it is usually a few days early.

On Friday, the A-D oscillator closed with an oversold reading of -150.  This tells me that the NYSE is still not EXTREMELY oversold.  It usually takes 2-3 days with A-D oscillator readings below -150 before the market starts a new rally, or one day with a reading below -200.  And this is why I believe that we will likely see more selling at the beginning of the week.  BTW, you might want to keep an eye on this indicator if the Dow starts to approach 15,850.  An EXTREMELY oversold A-D oscillator at these levels could be a very attractive buying opportunity.

From a candlestick perspective, we have seen several large down candlesticks in the past three days.  As I teach in class, it’s not likely that the ‘bottom’ has arrived until we start to see several days of small candlesticks develop.  So be patient.

And finally, there’s The Professor.  He’s just been sitting there watching. When the Dow was teasing that it could be ready to break out higher, he said NO…wait!   And right now, with most of my indicators showing Red, he’s still saying No!  But now we’re talking about the start of a new down trend.  On Friday, he only highlighted 16 stocks to the downside.  When you step back and look at the performance of The Professor during the past two months, it’s been pretty incredible.  On 13 February, the Dow was trading at 16,027.  On Friday, it closed at 16,026, only one point from February’s reading.  During this two month period, the Dow traded in a very narrow range between 16,046 and 16,631 with 18 days of moves greater than 85 points.  Talk about extreme volatility!  Volatility that was driving the folks on CNBC and Fox Business News nuts! But never once did The Professor get excited about any of this.  He sat quietly in his office telling us to stay on the sidelines.

So that’s what I’m doing now.  I’m still holding all of my energy and medical device issues and waiting for The Professor to give me the ‘all clear’ signal before I put the rest of my money to work.   By staying in the strongest sectors, I have protected about 70 percent of my assets and now stand ready to go shopping for bargains with the other 30 percent that has remained in cash.

Have a great weekend. That’s what I’m doing,

h 

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