The Big Wave Trading Directional Models have undergone a couple of changes the past week. The first change was on Thursday when our models switched to NEUTRAL following the back-to-back gap reversals in overbought conditions. The second change came on Friday when the SP-500 and DJIA were able to immediately reverse those losses closing near the HOD and in new all-time high ground. The Nasdaq, Nasdaq 100, and Russell 2000 remain under a NEUTRAL condition. The Nasdaq and Nasdaq 100 is on the cusp of reacquiring its BUY condition as they are within a hair of new 52-week highs.
The changes in our models are not signals to sell all of our long positions when we switch to a NEUTRAL condition, like some do believe. What a switch to NEUTRAL means is that we operate from a more careful criteria selection. Our signals must be stronger in high-quality stocks and our position in those new signals will be smaller. When we are under a NEUTRAL signal it means that when a new long or a previous recent long has not been moving higher immediately, we must begin to cut losses even if the pattern remains true and above our final cut loss level. It also means that we will sell high volume breaks below the 5 day moving average and increase the size of our profit taking signals with high volume closes below the 20 day moving average. We will also call on small hedges if we are heavily long going into a switch to NEUTRAL.
In the context of a bull market with interest rates low and not rising any time soon, this is how a NEUTRAL signal works. The Big Wave Trading portfolios remain extremely long with tiny hedges in place. We did build a small cash position following the price action on Wednesday and Thursday but it already appears that it is going to be nearly all be put back to work following four strong long signals generated on Friday. Receiving so many long signals, after two reversal days, is yet another short-term positive for the market, despite this market still being in overbought conditions.
I know that we keep talking about the market being overbought and that is because it is more risky taking on new long positions up here compared to when they were finding support following the last sell off. The risk is larger meaning that taking a 10-20% position size per overnight trade here is not recommended. A further backing and filling here, allowing the 50 and 200 day moving averages of the indexes to catch up to the price would be extremely healthy and offer up much better reward/risk ratio. For now, it remains a tad risky so invest accordingly.
We are on our toes ready for anything and everything. There are going to be no surprises on our end, no matter what the situation is in the Middle East or the Ukraine. Enjoy the rest of your weekend and we wish you the best during the upcoming week. Thank you. Aloha.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE OUR SIGNAL DATE – DATE OF SIGNAL
VIPS long – 474% – 7/17/13
HEES long – 242% – 9/4/12
AER long – 173% – 6/27/13
TPL long – 157% – 10/22/13
WDC long – 130% – 1/9/13
USCR long – 82% – 4/12/13
OVAS long – 47% – 8/8/14
CLR long – 25% – 3/28/14
ENPH long – 25% – 8/14/14
