Weekend Strategy Review December 7, 2013

Posted by OMS  at December 8th, 2013

One of the more interesting things that happened yesterday was with Apple, AAPL.  With the Dow up over 200 points at one time, APPL was actually down almost 8 points.  That’s right, Apple, the stock that has been leading the NASDAQ higher for the past few weeks was down 8 points on a day when the Dow was popping for 200 points and the NASDAQ was setting a new record high.  How could this happen?  Hmmm?

Well, remember last week when I talked about AAPL and asked you to calculate your own target for APPL, you should have come up with something very close to 575.  If you added the 61 point stick to the 21 November low of 514, the target was 575.  So on Thursday, the day before Friday’s pop, APPL had already reached its target. It hit a high of 575.14. And because of this, it did not respond at all to the Jobs Report.  Having reached its target, it actually started to trade lower.  That’s what stocks do.

I always say that stocks go to targets and not to heaven.  So on a day when most stocks were rising, AAPL was falling.  Many traders were taking profit in AAPL and using the money to cover their short positions.  This is what produced the short squeeze on many of the stocks that were causing the overall market to pop higher. 

Anyhow, IF you were trading AAPL, I hope you calculated your target and managed your money.  The Coach, my primary Money Flow indicator, was also telling me that the Big Boys were dumping APPL on Friday, as the indicator is now negative.  So now it appears that before AAPL can move higher, it will need to take a breather and form a new pattern.

How much of a breather?  Well, the 50 is currently near 521, and the 200 is close to 492.  If APPL pulls back to one of its moving averages, it will likely take the NASDAQ with it.  Remember about a month ago, when I was talking about AAPL and how it was in the process of turning?  One of the things I mentioned was that if AAPL started to move higher in an Uptrend, it would likely push the NASDAQ higher.  And now we see the NASDAQ at record highs.

But now that AAPL now appears to have reached its target and looks like it wants to pull back, what do you suppose will happen to the overall NASDAQ?  Keep that thought in mind while I talk about the trade I posted on Thursday…

On Thursday, I mentioned that I would be looking to short the SPX if it got above 1805.  At the time, with the SPX trading at 1784, reaching 1805 appeared to be a stretch.  Those 21 S&P points would require a massive 170 point move in the Dow.  On Friday, we got 198 points!

But if you looked at the pattern and the fact that the Dean’s List was still positive, it wasn’t a stretch at all to see that a Big “b” wave move was not only possible, it was highly likely given the developing a-b-c pattern.  And that’s exactly what happened.

This is why patterns and targets are such a big part of The Professor’s Methodology. If you don’t have a pattern, and only trade the indicators, or worse, rely on the talking heads on CNBC, you really don’t have anything.  That’s why we use the SIGN, which consists of the Dean’s List, Patterns and Indicators. 

This is one of the reasons I have been reluctant to short the market.  The DIA, SPY and QQQ were still on the Dean’s List.  The List was still positive.  Also, because the indicators were mixed, and without a distinct pattern to trade, a pop like we saw on Friday was very likely to happen.  The markets were still in Uptrends.  So all they required for a pop was a trigger, and the jobs report provided that in spades.  I’ll talk about the report in a minute, but before I do, I want to finish my thought about shorting.

For the past few weeks, I have been saying that this is not the time to be buying stocks.  I have also been saying that it is also too early to start shorting.  That’s because the market is in transition.  If it does start to decline during the next few weeks, I only expect this decline to be temporary.  It should prove to be more of a buying opportunity than anything else.

Why?  Well, take a good look at APPL.  IF AAPL pulls back like I expect, because the stock is in an Uptrend, any pullback should now be viewed as a Rifle Trade.  That’s what we do when stocks like AAPL are in Uptrends and pullback to form Blades.  They form patterns that projects higher prices.

And IF AAPL pulls back, because it is such a large part of the NASDAQ, it argues that any HS pattern that forms will have the effect of pulling the NASDAQ higher.

This is one of the reasons that I believe we could see the Dow trading closer to 17,000 next year.

Right now most of the stocks on the NYSE are still in Uptrends.  So any pullback in them will likely also form HS Patterns.  And when they do, they too can be traded as Rifle Trades.  Here’s the thing:  We won’t start looking to establish Basic Positions on the short side until the Dean’s List, pattern and the indicators tell us it’s time.  Now is NOT the time.

However, for the very short term, it appears that the SPX will trade between 1805 and 1813 on the upside.  If it starts to exceed 1813, then some other pattern is likely unfolding.  Just what this pattern might be is a mystery to me at this time, so I’m not concerned about it.  What I will be focusing on this week, especially with a negative A-D oscillator, is the SPX short trade I mentioned on Thursday using SDS, the inverse S&P500 ETF.  Now that Friday’s pop produced what appears to be a short term ‘b’ wave in an a-b-c pattern, I will be looking for some type of ‘c’ wave down to develop.  If I’m correct about this, the SPX should start to break the 1780 level, eventually falling to 1740 or below.  And IF this happens and we get below 1750, that’s where I will start shopping for bargains for the final ride up.

This is my Big Picture Strategy going forward. 

BTW, before I close, I wanted to comment on Friday’s Jobs Report.  Recall that the major concern of the markets for the past few weeks has been about the Feds tapering.  But this went out the window on Friday when the BLS announced that 203,000 new jobs were created in November, pushing the unemployment rate down to 7 percent from 7.3 percent.  Hmmm?  It’s pretty easy to push the unemployment rate down when you don’t count the number of folks that have stopped looking for work which remains pathetic.  By the BLS’s own admission, the November numbers were confused by the fact that all of the government workers returned to work.  So the numbers were questionable at best.  Anyhow, I still don’t trust the employment rate.  But it doesn’t matter.  What I found interesting was that during the weeks prior to the release of the jobs number, the markets were worried about a lower employment number, because it would increase the likelihood of the Fed starting to taper early.  So the unemployment number comes in lower than expected and what does the market do?  The Dow rallies for 198 points.  Totally ridiculous!  Apparently, the market doesn’t know what it wants.  One day it’s worried that a lower unemployment number will cause the Fed to reduce its stimulus program causing the equity markets to tank.  Then when the actual number comes in lower than anyone expects the market rallies.  Go figure.

This is why I use Lists, Patterns and Indicators.  To do otherwise is absolutely insane!

Have a great weekend,

That’s what I’m doing,

h

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