Reasons I'm not changing my positions
Friday's action was a nice big fat short-covering rally that rocketed the Dow up more than 200 points. The catalysts were two fold. Setting the stage was the 4 hr daily chart score that I calculate. It was very green and favored a move up. Then, the Chinese economic data spurred the "bad news is good news" crowd on hopes for Chinese stimulus. Boy, these stimulus junkies are desperate for something.. anything.. to get the market moving back up. The potential for a big up move (on Monday) caused a massive amount of short covering and we were up, up, and away. The decision on China stimulus is expected on Sunday. If it doesn't happen, or if it's not as big as the whisper number, look out below. This could turn out to be a classic "buy the rumor and sell the news" event.
The daily scores performed as we would expect on a big up day. The 4 hr is back in the yellow after a very green number Thursday.
Before we get into the rest of the charts, I'm going to outline a couple reasons why I'm not convinced that this rally will carry on for very long. First, the RumWave is at a mid range point on a downward slide. All I can really do is compare where it is now with historically similar instances and draw the most informed conclusion possible. The conclusion that I have reached is that in past examples where the RumWave looked very similar, the best move was to stay the course.
Below is an example of the DJIA from 1 Nov through 25 Nov 2011 (the highlighted white rectangle on the chart shows the dates mentioned). The RumWave provided a sell signal just prior to 1 Nov, and we got a couple red candles downward. Over the next 10 or so days, the market rallied. During that time, the 3x inverse leveraged ETF that I use was down as much as 12%. During that entire time the RumWave scores were decreasing as the market moved higher. Then around 15 November the market snapped lower. During this time the inverse ETF made up some serious ground. On 25 Nov the RumWave signaled a reversal of direction (which correlated perfectly with the bottom) and the ETF had achieved an 8% profit. I give this example because the RumWave looked very very much like it does now. What that means is that I'm in for some pain on the UltraWave for a little while, but I have faith that the RumWave indications will hold true. There is no such thing as a crystal ball in this game, but the RumWave is the closest thing I've found to it. The RumWave, unlike us mortal humans, is not subject to emotional swings that come from big market moves against us. That is one of the reasons it is so great!
|DJIA 1 Nov - 25 Nov (white shaded box)|
Above is another tool that RumWavers need to be familiar with. It is called the McClellan Oscillator. The chart is provided by StockCharts.com, and the definition if from investopedia.com. It doesn't take a rocket surgeon to see what is going on here. When the chart shows very high numbers, it reverses back down to lower numbers. In a very broad, unscientific sense higher peaks usually return to lower troughs. Currently, the McClellan Oscillator is only at mid-range after a very high peak. This is a warning that Friday's rally may not be one to hang your hat on.
|DJIA 4 Hr Chart|
Above is the 4 hr chart. It was a big strong rally that will likely carry some momentum with it in the next week.
|DJIA Daily Chart|
The daily chart is also just what we would expect on a big rally. We will see how it plays out over the next week or so.