Weekend Strategy Review April 5, 2014

Posted by OMS  at April 6th, 2014

The Dow rose 59 points early Friday after reacting to the positive Jobs Report reaching an intraday high of 16,632.  Then once the news was digested, it fell 219 points to close down 160 points at 16,412.  The Dow was up 89 points for the week.  The OTC market was down a whopping 110 points on Friday, closing at 4,125.  It was down 28 points for the week.  It was another tough week for technology and biotech issues.

Friday’s decline turned most of my breadth indicators negative.  So once again, I’m seeing lots of mixed signals on the board.  These signals are coming at a time when the Dow has broken above the December 2013 high of 16,588 which favors the ‘near or above 17,000 scenario’ that I have been talking about for weeks.  However with the breadth indicators and P-volume diverging and now turning negative, we will have to watch these indicators carefully and stay on our toes.

All of the Bullish consolidation patterns that I have been talking about for the past few weeks remain in place, and should provide the springboard for higher prices.  But unless the technology and biotech stocks on the NASDAQ start to attract buyers, it makes me believe that the participation to the final run to the top will be limited to a very small group of stocks.  This is why I continue to believe that any new buying at this point should be very selective and limited to those stocks and ETFs from the Dean’s List and Member’s Watch List.

Even though the markets should be heading higher, it’s starting to appear that several groups have topped and are starting to roll over.  For example, if you look at biotechs as a group, the pattern is definitely not positive.  As a matter of fact, the pattern on the biotechs (show in the attached chart) is horrible!  The sector appears to have topped on 6 March and is in the process of forming a negative Hockey Stick as part of a significant Head and Shoulders reversal pattern.  Anybody who owns biotechs now should be very concerned about this negative pattern, because it calls for significantly lower prices.

Another way to look at this pattern is as a Three Highs to a Top (THT). After seeing a THT Pattern develop, I always look to short the stock when the PT indicators turn negative.  The PT indicators on the biotechs turned negative on 25 March.  If the recent lows are broken, the pattern projects a drop of over 1,000 points from current levels.  So be extremely careful with any stocks in this group now, particularly those with high P/Es.

Right now the Dean’s List is still positive with DIA, DDM and SPY still on the List. However, the inverse NASDAQ 100 index ETF, QID, and  TWM, the UltraShort ETF for the Russell 2000, are also on the List.  So taken together with the very Bearish Pattern on the biotechs, small technology stocks need to be watched carefully.  This is NOT the time to be thinking about adding them to your portfolio.

On the other hand, just about all of our energy issues and medical equipment stocks held up nicely on Friday, with little or no technical damage.  Mylan Labs, one of the stocks I mentioned during the week along with MDT and SYK was up over 5 points early Friday when it was announced that it was looking to buy Swedish generic-drug maker Meda.  However, the stock gave back nearly all of its early gains when Meda said it rejected the offer and ended further discussions. MYL closed up 0.77 cents for the day.  The thing I found interesting in all of this was how Emeritus was able to identify  MYL and place it on the Honor Roll several days before the acquisition was announced.  We have seen Emeritus do this several times in the past few months, and is just another reason to pay attention to the stocks he highlights.

Ok, so what am I doing now? Well, I’m still holding my energy and medical equipment issues.  They are still among the strongest sectors, which despite Friday’s pullback, continues to improve. Last week, 15 out of the 20 sectors I monitor had negative trend scores.  This week, only 5 out of the 20 are negative.

So with a mixed to positive Dean’s List, improving trend scores for most sectors, and positive patterns for the DOW, SPX and NASDAQ, I remain positive. 

However, the old Professor still hasn’t given me the Green light to enter this market on a broader basis, and until he does so, I’m going to stay with my energy and medical equipment issues.

BTW, The Professor only had 3 longs on Thursday and 2 on Friday.  It’s one of the reasons I decided to take a break from the action and spend some time with my son and his family in St. Pete.

That’s what I’m doing,

h

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