Weekend Strategy Review January 9, 2016

Posted by OMS  at January 9th, 2016

After Friday’s opening rally of 136 points, the Dow started to slide and closed down another 166 points at 16,346.  It was down 1,079 points for the week.  The NASDAQ was down 46 points on Friday and down 364 points for the week.

In my Comments last week, I said that the market would not stay in the Wedge Pattern forever.  And the longer prices stayed in the Wedge, the more volatile the breakout move would be.  It’s one of the things that happens after prices consolidate for over two months. This is what produces 1,000 point moves.

OK, so where are we this weekend?  Hmmm?  Well, my initial target for the current impulse wave down was the 16,000 level.  So we’re about three quarters of the way to that targget after Friday’s close.  But my real target for Major Wave 3 down is below last August’s low of 15,370, so the Dow is still a thousand points from reaching that level.  I still believe there’s a lot more decline to come. 

One of the things I talked about on Friday was the rallies and how they should be viewed as shorting opportunities.  In a Major decline like the one we’re seeing now, there will always be several short-term rallies.  If you are trading this current decline, and managing your money as the market moves down, the rallies give you a new opportunity to put some of your money back to work at higher prices.  Then once the market starts to resume its decline, you can take some of that money off the table again, protecting your profits and putting you back in position to take advantage of the next rally.  By doing this, you are protecting your hard earned profits and playing with ‘house’ money. 

Just keep an eye on the Dean’s List and The Tide.  As long as they remain negative, odds are that the market is going lower.  Yeah, there will likely be rallies along way down, but as long as The List and The Tide stay negative, I have to assume it’s going a lot lower.  Remember, we started off the current decline with a negative pattern, Then once the pattern broke down, the Professor algorithm highlighted over 70 shorts.  That’s a lot of shorts!  And while I don’t have a lot of data on the short side, I know that whenever the Professor highlighted over 26-28 shorts, it has led to a significant decline in the past. So we have a negative pattern, The Professor, the Dean’s List and The Tide all suggesting lower prices. 

Anyhow, this is not what I wanted to talk about today.  On Friday I mentioned that I wanted to talk about divergences and how I use them to pick the stocks I want to short. 

As you know, when I’m looking for an individual stock to short, I ALWAYS start with stocks from the Honor Roll.  Honor Roll shorts are usually not on the Dean’s List because they are starting to weaken and could be ready to enter a down trend.  This is what catches the attention of the Emeritus algorithm. It looks for stocks where the Bollinger Bands have narrowed and the Money Flow is starting to weaken. 

You can see this clearly in two of the stocks Emeritus recently highlighted as shorts Checkpoint Software (CHPT) and Mellanox Technologies (MLNX).  If you look at the attached chart of CHPT, the two red lines show the price moving higher as the Money Flow (Chaikin) moves lower.  This classic negative divergence is a warning that prices could be ready to start moving lower soon.

So once I see this divergence, I start looking for entry points.  This is where I start using the shorter term charts, like the 10, 15, or 60s. 

If I’m scalping , I look for this same negative divergence on the shorter term charts and once the Money Flow and the Fast Stochastic turn negative, I enter the trade.

For those longer term traders who either can’t or don’t want to look at charts during the day, there is nothing wrong with establishing short positions based on the same divergence and indicators on the Daily Chart.

The attached Daily Chart for Apple shows what happened after Emeritus highlighted the stock.  Again, the algorithm saw the tight Bollinger Bands and a weakening Money Flow indicator.  Then once the momentum started to shift (Fast Stochastic turned negative), the downside move was on.  A few days later the Aroon Indicator went into the Trend Mode where it continues today.

Here’s the thing:  Even though I talk a lot about scalp trading and how I use the shorter term bars to establish entry points, longer term traders DO NOT have to do this.  The same techniques I use on the shorter term bars can be used on the Daily Bars.  The only difference is the time period. Otherwise, it’s exactly the same technique. 

One of the things you should realize when using the Daily Bars is that it usually takes several days before an entry into an Honor Roll stock is triggered. So you need to be patient and wait for the indicators to turn. But the fact that Emeritus highlighted the stock means that it has tight bands, weak money flow, and a CCI that is suggesting the start of a trend.  Just be patient and wait for all the indicators to line up.

I’m not very patient.  This is why I trade the shorter term bars.  They turn a lot faster and let me scalp trade an Honor Roll stock while I wait for the Daily bars to turn.  But once the Daily bars turn, I stop scalping and start holding some of the position. 

The other thing I do when I’m looking to enter a position is to use a small trendline on the Money Flow indicator.  This small trend line gives me an early warning several time periods before the Money Flow indicator changes direction.  I’ll ‘m running out of time so I’ll show you exactly how I do this next week.

But this weekend, I want to make sure that you are looking for and paying attention to the divergences.

The other thing I want you to do is protect yourself.  Things could get very ugly in the months ahead.   Remember, it this is the start of Major Wave 3 down in a Major Bear Market, the decline could last for several years.  I talk about a target below the August low, but the thing you should realize is that IF this happens, it will set up even deeper declines once all five waves of the Bear are complete.

This is why you need to protect yourself and learn to profit from the Bear, just like you did from the Bull.  We’re going to use the exact same techniques, only in reverse.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

01-11-2016

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