Professor’s Comments March 23, 2018
Posted by OMS at March 23rd, 2018
The good news is that I got my internet back. Comcast determined I had a bad modem and replaced it. The bad news is that the U.S. could be starting a trade war with China.
In my recent Class About Nothing, I talked about the two Scenarios for the Dow. The Bullish Scenario was based on a large consolidation triangle. And because prices usually leave the triangle in the direction they entered the pattern, seeing the triangle form was a Bullish development….
Unless of course IF prices broke out of the triangle to the downside. And that’s what may have occurred yesterday. Then instead of the pattern being a Bullish triangle, it was the simply the initial waves of Wave 3 down, the impulse wave in the Bearish Scenario. The pattern will be confirmed if prices continue to decline and move below the 200-day moving average now located at 23,532.
One of the things I mentioned in my Class About Nothing that could cause the Bearish Scenario was some type of ‘Black Swan’ event, like a Trade War. So on Monday, President Trump placed tariffs on imported steel and aluminum. Then yesterday, China responded by threatening to place tariffs on 128 American products. So the possibility of a trade war starting is real. If China follows through on its threat, the Trade War will be on. Let’s hope that cooler heads prevail. I don’t want a trade war with China. It would be stupid! China owns us! When a country owns the majority of our debt (Bonds), it owns you, just like if you have a mortgage with a bank. The bank owns the property until you pay off the loan. So just like you would never want to tick off your bank, (they might call in your loan), it’s never a good idea to tick off the people who are lending you money by buying (and holding) the majority of your Bonds. It’s actually a pretty stupid idea! Can you imagine what would happen IF China decided to sell all of the U.S Bonds it currently holds. Heck, if China just stopped buying our Bonds, it would likely cause the U.S. economy to enter a depression. Remember, as a country, we’re now over $20 Trillion in debt!!!!
The Dow responded by dropping 727 points, closing at 23,957. The NASDAQ and SPX fell 179 and 68 points respectively. Volume on the NYSE was heavy, coming in at 110 percent of its 10-day average. There were 25 new highs and 128 new lows.
Yesterday’s decline stopped just below the lower trend line of the triangle. So we’re at a Major cross roads this morning. Simple put, the Dow CAN NOT move lower from current levels. It MUST bounce if the Bullish Scenario is to remain valid. Otherwise the Dow will continue its decline as the impulse wave pushes the indicators into the Trend Mode. This would also signal that the Bull Market that started in March 2009 is over.
Last night, my the VTI portion of my combination VTI-volume indicator closed with a reading of 30.3, so its almost in the Down Trend Mode. Any further weakness on the Dow will almost surely cause the indicator to signal a down trend is starting. This is NOT what you want to see. The VTI-volume indicator has been a very reliable indicator and seeing it enter the Down Trend Mode would NOT be a good thing. Remember, the indicator signaled the start of the current decline on 21 March when it turned negative. So now the Dow is down 725 points since that signal. If it enters the Trend Mode, be careful. Given the pattern, it would mean the Down Trend could turn into a Crash!
So the markets MUST start to rally IF this EXTREMELY serious situation is to be avoided. What are the positives at this point that could trigger a rally? Hmmm?
Well, the market is EXTREMELY oversold after yesterday’s rout. The 2-period RSI on the Dow closed with a reading of 4.94. So IF the Dow doesn’t enter the Trend Mode, the markets should bounce. By itself, I wouldn’t bet on it.
On the other hand, the Dow closed below its lower Bollinger Band. So IF the Dow can bounce today and close back above the lower Bollinger Band, it would generate a Bollinger Band Buy Signal. That’s a Big IF. Again, I wouldn’t count on it.
Also, yesterday was a 90 percent volume down day, with the A-D oscillator only reading -122.94. This condition usually produces a bounce. The only time it doesn’t is when the market is crashing. So again, I wouldn’t count on it.
Other than these three items, there isn’t much on the positive side. So you need to weight these positives against a ton of negatives.
I’m not giving up on the Bullish Scenario yet, but if the downdraft continues today, it might be time to through in the towel. Like I said yesterday, the Fed is working against us on two fronts: Raising short-term interest rates and selling securities (Quantitative Unwinding). It’s never a good idea to fight the Fed. And now with the possibility of a Trade War with China starting, it’s even more so.
BTW, yesterday’s Sector Ratio closed with a reading of 7-17 negative. The seven positive sectors were Semiconductors, Household Products, Technology, Healthcare, Computers, Leisure and Service. The Weakest Sectors were Real Estate, Food Drug, Autos, Material, and Transportation. A 30 dollar auto stock like GM dropped 1.23 yesterday, while a 50 dollar stock like INTC only lost 0.78 cents. That’s why you want to stay in the strong sectors.
Also BTW, IF the market does start to rally (again, a BIG IF), INTC finished the day with a 2-period RSI reading of 20.66, so it’s oversold with its VTI-volume indicator still in the Up Trend Zone. So If the market starts to rally (again a BIG IF) I’m going to buy INTC.
Otherwise I’ll remain on the sidelines. Remember, with NO Trend conditions in place, I’m still scalping, which means I’m not holding positions overnight. That’s why yesterday’s decline didn’t bother me a bit.
That’s what I’m doing,
h
Market Signals for
03-23-2018
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
SUM IND | NEG |
VTI | NEG |
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