Weekend Strategy Review November 17, 2013

Posted by OMS  at November 17th, 2013

Good morning!

On Friday, the Dow rose 86 points to another record high, closing at 15,962.  It was up 200 points for the week.   The NASDAQ also rose 13 points to a record high of 3,985 and was up 67 points for the week.  Volume was relatively light on the rally, coming in at 94 percent of its 10 day average.  There were 239 new highs and only 17 new lows.

At this point, the pattern on the Dow, NASDAQ, and SPX is not clear.  Last week’s trading action suggests that the current rally can either continue or a significant decline could be ready to start.  There is no way to tell.  So in times like this, we need to rely on our other tools, namely our Lists and indicators.  Right now, both of these are positive.  And as I’ve been saying for weeks now, as long as the Dean’s List and indicators are positive, I will remain positive.

If you currently own a few stocks on the MWL, I would just continue to hold them. But I would continue to take a few bucks off the table as they approach their targets.  This is pretty a easy strategy.  However the harder part will come when you sell your winners and then look for another stock to trade.   This is where you will need to be patient.

On Friday, I mentioned that this is the time to be very selective in your stock picking.  You MUST pay attention to the SIGN.  The A-D oscillator is telling us that fewer and fewer stocks are participating in this rally, so you need to make sure that any stock you are considering for purchase is 1) on a List, 2) has a pattern and 3) has positive indicators.  If it doesn’t and you buy it willy-nilly, you are just asking for trouble.

Last week we saw what happens when you stick to stocks with strong turn around patterns.  For example, Marathon Pete jumped over 9 points and Tesoro over 5 when institutional money started to enter the stocks.  Same for China Pete, which jumped 3.48 points on Friday after it was identified as a Rifle Trade.  Remember, this is a time where there is a lot of rotation going on.  The Big Boys are moving out of their overbought winners and into stocks with better perceived value. 

On Friday,  Gene S. wrote to say he got out of his trade on SNP yesterday (Thursday) and then bought another half position of late yesterday afternoon when the indicators turned positive on the 60’s.   He said he was up $3.40 so far today!!! 

Gene also submitted Ryland Homes, RYL, as a potential turnaround candidate for discussion this weekend.  He wrote, “RYL went into a downtrend around the 20th of August after a TLB pattern.  Since then it has jumped the ropes twice and appears to be getting ready again.  The 50 has been moving closer to the 200 and now is just .39 below.  IF RYL continues this path it should move into an uptrend soon.  Currently all the indicators are red on the Daily’s so waiting for them to turn green.”

The major problem I have with Gene’s logic is that RYL has fallen below the moving averages, is RED and is NOT on the Member’s Watch List at this time.  When I want to buy a stock, I always need to see it on the List, with positive indicators.  So I wouldn’t be interested in RYL at this time.

On the other hand, Pulte Homes, PHM, is on the Member’s Watch List and does have a nice pattern with positive PT indicators.   As long as PHM remains above 17.50, it will continue to pull the 50 above the 200. Once this happens, I would become extremely interested in the stock.  That’s when the institutions will start to come in.

Tom Y. writes that he is watching Gamestop, GME,  and AAPL as upcoming Rifle Trades.  Tony plans to trade GME on the hourly bars.  Hmmm? 

After reading Tom’s email I saw that GME was also not on the Member’s Watch List.   However it was not on the List for a different reason.  Nobody suggested that it be put on the List.  So after looking at the chart, I decided to add it.   The stock pulled back 0.90 cents on Friday, which is not exactly what I would want to see on a big up day in the market. However by pulling back, the 2-period RSI Wilder dropped into oversold territory making it a Rifle Trade on the 60s.   The stock is in a well-established Uptrend, with positive PT indicators.  So as far as the Professor’s Methodology is concerned, Tom’s analysis is correct, and GME is a Rifle Trade on the 60s.  My only concern at this point is that GMI is getting very long in the tooth and has a THT Pattern. The stock appears to be rising off the Hockey Stick Pattern that started in last May.  If this pattern is what’s driving GME higher, then the target should be about 8-10 points higher.  This is the type of stock that I would only buy on pullbacks, and IF it turned negative, I would  get out of it in a heartbeat. 

At this point in the cycle, I prefer to be trading turn around candidates.  You have to understand that the current market is very fickle. It is also trading at record highs.   Yesterday I talked about how companies that miss on their revenue estimates are getting hammered.  So if you bought a few shares of a company like GME, you’re essentially betting that it will continue to exceed both earnings and revenue estimates.  I’m not so sure that this is a good bet in this environment. Yesterday I saw a poll that said consumers will be spending less on Christmas this year than last.  And a good portion of GME’s revenue comes from Christmas game sales.  If the revenues miss, GME could be one of those stocks that gets hammered overnight.

Tony’s choice of Apple. AAPL, is also interesting.  The stock is currently in an Uptrend and can be Rifle Traded on the 60s.  As I have mentioned many times before, the institutions love Apple.  And now that the stock is in an Uptrend, they can play.

Cliffs Natural Resources, CLF, was also proposed for review because of its pattern.  CLF is a mining and natural resources company that engages in the production of iron ore pellets and coal.   Cliffs is an example of a great old company in an industry sector that is being hammered by the policies of the Obama Administration.  I don’t expect that these policies will change anytime soon.  And meanwhile, the company has no earnings and is losing money.  So even though CLF has pattern that qualifies it as a candidate, I need to see it do a lot more from a stock before I become interested.  CLF is NOT like the other turn around candidates that I have been talking about for the past two weeks, like the refiners.  Marathon Pete, MPC, had been falling because oil prices were rising, which depressed its margines, earnings, and price.  But MPC still had earnings.  When the price of crude started to fall, margins went up, helping cause the turn around.  Right now, I don’t see anything similar to this happening in the coal industry.  So while I will put CLF on my radar because of its TLB Pattern and recent Rope Jump, I will need to see a LOT more from the stock before I become interested.  For starters I will need to see it enter an uptrend.

BTW, I will likely be dropping CLF from the Member’s Watch List in the near future because of its negative earnings.  Stocks with negative earnings do not qualify for the MWL.  There are too many other depressed stocks with positive earnings for me to be looking at something like CLF.

CLF is a lot like Royal Gold.  RGLD also had TLB Pattern, and a Rope Jump.  But it never did pull its 50 above the 200.  And as we have seen or the past few weeks, RGLD just continued with its down trend.  Right now there is a danger of CLF doing the same thing. 

Crown Castle, CCI, Peabody Energy, BTU, and CROX were also submitted.

After looking the chart of CCI, I really don’t know what that pattern is.  And when I can’t tell immediately, I pass on it.

BTU is in the same category as Cliffs.  The stock has an interesting pattern but no earnings.  However, given that both CLF and BTU are now on the Member’s Watch List, there may be something going on with the coal miners.  With turn around candidates, it’s usually the pattern that trumps everything.  The pattern could be telling us that the earnings are starting to improve, which could push the stock price higher.  Because of this I’m gonna keep both CLF and BTU on the MWL a bit longer.  I would become very interested in BTU if it moved past 21.28.

CROX appears to be starting a downtrend and looks like it wants to go lower. The company has some major problems managing existing stores. Also, its main product lime, clogs, is starting to look like a fad in America and Japan.  I’m not interested at all in this stock.  If this were a different market, I might even consider it as a short.

Bottom Line:  After looking at all of the stocks submitted this weekend, I still believe that the refiners are the most interesting.  Now that MPC and SNP have entered their Uptrends, I will be looking to buy additional shares on pullbacks.  As we saw on Friday with SNP, once a stock moves into an Uptrend, it starts to attract the Big Boys.  And they usually don’t play just for the short term.  No, they start to accumulate lots of shares, but try to do it without driving the price up.  This is what causes the pullbacks.  So in the weeks ahead, I will be using the 2-period RSI Wilder to find the times when the Big Boys are not aggressively buying.  We already know that they like the refiners.  The turn around told us that.  Now all we need to do is look for times when the stocks are ‘on sale’.

Have a great weekend.

That’s what I’m doing,

h

FAQ

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.