Weekend Strategy Review January 18, 2014

Posted by OMS  at January 18th, 2014

The Dow rose 42 points on Friday, closing at 16,458.  It was up 21 points for the week.  The broader SPX fell 4 points on Friday, closing at 1839, which was a loss of 4 points for the week.  The weekly low for the SPX was 1815, which tested and held the lower boundary of the current trading range. There were 187 new highs and 22 new lows.

Friday was an options expiration and the Big Boys kept the markets in a very narrow trading range to accommodate all of the expiring options.. So the small change signal from the A-D oscillator is still on the Board and will carry over until Tuesday when the markets reopen.  They will be closed on Monday for the Martin Luther King Holiday.

Bottom line is that we wait.  The current sideways triangle pattern appears to have completed on Friday.  So now I will be watching for an upside breakout early next week.  IF the markets does start to break to the upside as I expect, I will be watching The Professor algorithm very closely to see what he says about the strength of any potential upside move.

On Friday, The Professor went back to sleep, with only 4 longs and 3 shorts.

Incidentally, I have received a lot of interest in The Professor algorithm since we started posting the results of the front page of the web site.  One of the questions has been, Why don’t I post the Sell Signals.  This is a very good question.  Actually there are several reasons for Not doing this.

The first is that 2013 was a year when the markets were trending to the Upside. And because I use the Professor to confirm that a new trend is starting when the DMI changes…there simply weren’t any negative trends to confirm.

There were two periods during the year when the Dow made minor corrections.  One in late May and the other in early August.  The highest number of shorts identified by The Professor during 22-28 May was 4.  The highest number of shorts identifies between 5-20 August was 9, which occurred on 6 August.  The interesting thing about this was that just about half of those shorts were gold related stocks.  During the rest of the period, the short signals averaged 5-6 each day.  

In effect, The Professor was telling us not to get too excited about the moves down. That they were only corrections I a very strong Bull Market. 

So knowing that The Professor is only designed to spot trend changes, it is unrealistic to expect him to provide us with sell signals in a trending Bull Market.  For sell signals, I rely on all of the other money management tools in The Professor’s Methodology.  Tools like talking half-off at the mid-point of a move, the PT indicators and close stops, especially when the price is getting close to my target

Besides, deciding when to sell is more of a personal choice. A lot of the sell decision is based on how much risk you want to assume.  Do you want to risk all of your profit and let it ride to maximize the gain, or do you want to manage your money and take a few bucks off and let the rest ride.  I’m very conservative so I tend to take profits a lot earlier than most traders.  I would rather leave some money on the table than sustain a loss.  Especially a loss after I had a profit in the stock. I hate that!.

During the week, I also received a question about gold.  If you have been watching the Lists, you probably noticed that for the past week or so, the metals have been prominently featured by the Dean.  Hmmm? So why am I not talking about them?  Well, to begin with, I believe that it’s still too early to get involved with them.  From a fundamental point of view, we have seen how the Fed has started its tapering program.  So the amount of new money being created is being  reduced.  This does not bode well for higher gold prices in the intermediate term.. 

The second thing has to do with the pattern.  Just about all of the gold stocks that I look at are still in down trends.  And while a lot of gold stocks started to appear on the List recently, all of them are just trades.  I talked about Royal Gold, RGLD a few weeks back, and how I would like to date her IF she came back into town.  Well, she turned Green on 2 January at the 49 level after a TLB pattern.  Now two weeks later, she’s at 53.61.  It’s been a nice date.  But that’s all it is…a date.

On Friday, RGLD ‘Jumped the Ropes’, so the odds are that the date could be getting close to ending.  If she turns Red, the date is over. 

One of the reasons I feel that the downtrend in gold is NOT complete is because most of the other gold stocks that I follow are not even close to performing a ‘Rope Jump’.  For example. AU is still over 3 points away from crossing its 200.  Same for AUY and ABX.  None of these are even close to telling me that they want to turn around yet.  So I can’t be serious about gold, even though the PT indicators are Green for the moment.

Besides, why would I even be thinking about trading gold now, and hoping for a move higher, when I have a beautiful sideways Bade forming on all of the major indices.  The pattern on the indexes is very close to being completed.  And with most stocks being in a well established Uptrend, with a positive Dean’s List and PT indicators that are mostly positive, the odds are high that the rally in the major markets will continue.

If the rally that I anticipate starts to happen, then most, if not all of the money that has been pushing gold prices higher for the past week or so will start to leave the gold market and move to into technology, health care, REITs, etc.

I believe  that once this starts to occur, gold stocks will resume their downward course.  How much lower?  I’ll stay with 1150 on gold (the metal).  This should take the HUI (gold bugs index) back under 200, possibly to the mid-180s.

Here’s the deal:  You know that I always say that trading is an odds game.  All we ever do with all of out technical indicators, Lists and algorithms is to put the odds on our side.  There are NO guarantees.  But given the opportunity to chose between something that is in an Uptrend with positive indicators and a positive pattern against gold stocks that are still in downtrends and having to hope that they will ‘Jump the Ropes” and start the turn around process, I’ll take the former every time.

During the week, I also received a question about the number of stocks that I trade.  The question arose because I mentioned that I was about 70 percent invested.  Actually after Friday, I’m now closer to 80 percent.

The student who sent in the question told me that he had about 20 stocks that he was trying to manage.  I shuddered when I read that.  Truth be told, I don’t know how anyone can manage more than 5-6 stocks at any one time.  In my Class and book I talk about 10 stocks as being the manageable limit.  But my limit is about 6.  If I want more, I’ll generally buy one of the index funds, like DIA, QQQ or SPY.  .BTW, that’s what I plan to do IF the Professor give us a buy signal next week.  I already have enough stocks which I bought from the Honor Roll.  Now, IF the market starts to move higher, I want to ensure that I have a broader participation.  The thing I don’t want to happen, which can occur if you only own individual stocks, or Bond Funds, is to see the market moving higher without your stock participating.  Don’t think it can happen? Well, think again and then look at the chart of Apple. 

Then take a quick look at the Dow Chart I posted with The Professor’s Buy Signals for 2013 Remember, this chart is only based on trading an index.  Hmmm?

Have a great weekend,

That’s what I’m doing.

h

BTW, please don’t send me any emails this weekend.  I probably won’t have time to answer any of them this Holiday weekend.  Thanks.

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