Weekend Strategy Review February 4, 2018
Posted by OMS at February 4th, 2018
The markets finished the week getting hammered. The Dow was down 666 points on Friday. It was down 1,096 points for the week, closing at 25,521. The NASDAQ and SPX were also down Big on the week, losing 145 and 60 points, respectively. One thing students should note about the decline. Although the NASDAQ and SPX experienced huge declines on the week, the loss did not even give back all the gains of the previous week, which were 169 and 63 points. Also, the Dow is still up over 800 points for the month. So, keep things in perspective.
It appears that Friday’s decline was wave ‘c’ of the corrective a-b-c pattern I talked about during the week. I was expecting the Dow to pull back to the 25,700+/- level. What I didn’t expect was that the pullback would occur in one day! The extremely small change in the A-D oscillator which predicted the Big Move may have had something to do with it. Also, the market had been on a parabolic wave 3 rally, and as I said, parabolic rallies NEVER end well. So, the Dow is now 1,000 points lower. What now?
Well, on the positive side, my VTI-volume indicator has still not generated a Sell Signal. The volume portion of the indicator is still pretty strong. The 2-period RSI is EXTREMELY oversold at 6.08. In other words, the market (Dow) is oversold and NOT in the Trend Mode. It should bounce from current levels.
There is a lot of cash on the sidelines, and the recent tax cuts could make even more money available to fuel a market rally. There is also a lot of ‘repatriated’ money moving back to the U.S. and companies will likely use a good portion of these funds to buy back shares which could push prices higher. So even though the market got hammered this week, there are still a lot of reasons to remain positive.
During the week, with the market at significantly higher levels, I talked about how the Dow could pull back to the 25,700+/- level. I also said that IF it did, I would view the pullback as a significant buying opportunity. I believe that opportunity is here now.
One negative I’m starting to get concerned about for the longer-term is the yield curve. It’s getting close to becoming inverted. Right now, the yield on the 10-year Treasury note is 2.78 percent, while the yield on the 30-year is 3.03 percent. This is something to watch, because IF the yield curve inverts, with short-term rates rising above the longer-term rates, it usually signals a coming recession.
This tends to fit with my longer-term outlook and patterns, because IF I’m correct about the current decline being wave 4 of a five-wave sequence to a top, wave five of the pattern should see the Dow rally to new highs, possibly getting to the 28,000 – 29,000+ level before the Bull Market ends.
BTW, TBT, the inverse Bond fund, has been on the Dean’s List for several weeks now. The ETF generated a VTI-volume Buy Signal on 17 January when it was trading at 34.88. It’s now at 37.84. More importantly, TBT has now made a ‘Rope Jump’, indicating its recent move is wave 1 up. Technically, the ETF is still in a down trend, with its 50 still below the 200. But because the price is now above the 50 and 200, it’s starting to pull the 50 up toward the 200. If the 50 crosses above the 200 and TBT moves into an Up Trend, it will be EXTREMELY negative for the equity markets. So, watch TBT.
TBT is extremely overbought now. It should pull back and start forming ‘Blade’ for wave 2. Once this ‘Blade’ completes, that’s when I would start to worry about the equity markets. Not now.
BTW, gold also pulled back on Friday, causing the 2-period RSI on GLD to close at 19.62. In other words, GLD is ripe for another Rifle Trade. GDX, the gold miner’s ETF, closed at 22.91 with an oversold 2-period RSI of 8.93. My targets for GLD and GDX remain at 135 and 28. Watch the shorter-term bars for trading opportunities.
The Sector Ratio is still very strong. Even after Friday’s beat down, the Ratio was still 18-6 positive. The Strongest Sectors were Specialty Banks, Healthcare, FoodDrug, Cap Equipment, and Computers. The Weakest Sectors were the Utes, Real Estate, Semis, Consumer Products, and Autos. BTW, last week, I mentioned that the Autos had a large negative Delta Trend Score and how this usually leads to additional losses. The Autos got crushed on Friday! Hmmm?
If the market starts to rebound next week, pay attention to the Strong Sector List. I believe it will be the stocks in these sectors that will lead the market higher.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for
02-05-2018
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
SUM IND | NEG |
VTI | NEG |
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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.
Category: Professor's Comments, Weekend Strategy Review