Weekend Strategy Review January 4, 2014

Posted by OMS  at January 5th, 2014

The Dow rose 28 points on Friday, closing at 16,441.  It was down 8 points for the shortened trading week.  The SPX  was flat on Friday, falling 10 points for the week to close at 1831.  Volume on the NYSE was lighter than normal, but it’s hard to assess if it means anything, given that a lot of traders were still on Holiday.  There were 95 new highs and 15 new lows.

While the media was focusing on the Dow’s bounce on Friday, I was focusing on the NASDAQ.  It’s the most interesting index to watch now, particularity with Apple (AAPL) looking like it wants to turn negative.  The stock dropped another 12 points on Friday after falling almost 8 points the day before.  This caused 2 of the 3 PT indicators to turn negative.  The MACD is the lone positive holdout, and it’s only hanging on by the hair of it’s chinny chin chin.

There’s a reason why I’m watching Apple now.  A few weeks ago, I mentioned how APPL, coming off its Hockey Stick Pattern, would lead the NASDAQ higher.  It did, reaching my exact target of 575.  But since reaching its target on 5 December, the stock has had a relatively tough time of it   During this same period, when the Dow was rising from 15,821 to a high of 16.588, Apple fell 34 points.  Hmmm?  Is there a problem here?  And if so, will it start to impact the NASDAQ and the other indices?   Hmmm?

If you look at a weekly chart of APPL, you;ll know why I’m concerned.  From the low established way back in April, it appears that the 50 percent retracement is nothing more than one big negative Hockey Stick.  So IF AAPL starts to decline now, that HS Pattern will start to dominate trading for the foreseeable future. 

While the talking heads on CNBC were talking about Twitter and Facebook, I decided to look at a few of the other technology stocks that used to dominate trading in previous years.  Stocks like Microsoft (MSFT), Oracle (ORCL) and Cisco Systems (CSCO) to name a few.  Here’s the deal.  These companies actually made things.  They got their revenue by producing and selling products that created jobs and helped America grow.  Not like today, where companies like Twitter and Facebook get their revenue from advertising based on the number of clicks a teenager makes when he sends a tweet to one of his friends.  Yeah, I know that Twitter and FB are popular right now, but I also know that they are not cheap based on any fundamental measure.  And when thing start to get tough, so will the advertising revenue.  And stocks with high multiples get clobbered. 

Anyhow, I reasoned that IF the real economy is going to grow and take the overall market with it, the recent decline in Apple should be an exception.  It should not be impacting the larger technology stocks on the NASDAQ.  It should be a fluke.  But unfortunately it’s not.  A stock like Microsoft is looking more like a short than a Buy.  It too has completed its THT Pattern and is now Red on the Daily’s.  The inverse HS Pattern that is currently in place has a target in the low 30s.  The stock is currently trading near 37.

Oracle (ORCL) has a similar THT Pattern on its chart, but the PT indicators are still Green.   But the indicators on Cisco (CSCO) have turned Red.  Since topping back in mid-August, the stock has continued to fall and is now in a well established downtrend.

In my Comments yesterday, I mentioned that I was concerned about the recent rally in the Dow and S&P, and how it could be a classic ‘overthrough’ as part of the Ending Diagonal Pattern   Anytime I see a potential wave “e” starting within a Ending Diagonal, I  MUST be concerned.  You should also be concerned!  And that’s because the Pattern could truncate.  In my opinion, the odds are about 60-40, possibly higher, in favor of a truncation. The reason I’m leaning toward truncation now is because of the Pattern  and the fact that it’s doing exactly what I would expect. So until proven otherwise, we need to start watching things very carefully now. If the Pattern looks like a duck, and quacks like a duck, it could be a duck.

Yesterday I talked about the need for the market to ‘rest’ for the next few weeks if it is to push higher.  It needs to form a Blade.  But if you look at something like CSCO, you can clearly see that many times the pullback, instead of forming a positive Blade to help move the stock higher, actualy turns out to be the initial wave of a Major move down.  This is why I get very concerned when I see the PT indicators turn Red after a THT Pattern.

This is also why I’m also watching the Dean’s List and The Professor very closely now.  If these guys start to tell me that new down wave is starting, I will get very concerned.

That’s because this wave will likely be different from all of the others we have seen during the past 5 years.   This wave down, IF it starts to occur, (and at this point it’s still a BIG IF), will likely be the start of a Major correction sequence in the markets.

So this is my Big Picture Strategy for the weekend.  As long as the Dean’s List and the PT indicators remain positive, I’m positive.  But IF they start to change, I’m out.  I will start looking to trade the short side, with both stocks and inverse index ETFs, as soon as The Professor tells me that a downtrend is starting.  On Friday, he was sleeping, with only 3 longs and 4 shorts being highlighted.  Once I know the market is heading south, I will look to Emeritus to tell me which stocks to short.

It’s still way too early to be doing this, but while the talking heads on CNBC are pushing Twitter and Facebook, I just wanted to remind you that the market doesn’t always go up.  And now that the market appears to be correcting in what could be the formation of a new positive Hockey Stick Pattern for a move higher, OR the first leg down of a Major down sequence, I’m happy to be on the sidelines.

Don’t worry.  We’ll know soon enough.  But I want you to keep a few things in mind before you even think about pushing that Buy button again:

– Apple and many other technology stocks are starting to look weak.  If AAPL turns negative this week, get concerned.

– Be aware that all of the indexes and most stocks are now forming THT Patterns.  If the PT indicators turn Red after a THT pattern, that’s when I always look to short the stock.

– Watch the Dean and The Professor.  If they turn negative, get concerned in a hurry!  You don’t want to fool with something that could be the final leg of an Ending Diagonal Pattern.

Watching.  Have a great weekend.

That’s what I’m doing.

h

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