Professor’s Comments August 16, 2018
Posted by OMS at August 16th, 2018
The markets had another strong down day yesterday testing major support levels before bouncing into the close. The Dow finished 138 points lower, closing at 25,162. The NASDAQ and SPX were down 97 and 22 points, respectively. Volume on the NYSE was heavy, coming in at 118 percent of its 10-day moving average. There were 55 new highs and 153 new lows. A few days ago, I mentioned how the number of highs and new lows were getting closer to each other. Now the number of new lows is exceeding the number of new highs. This is usually a sign that a top of major significance is approaching.
Same for the increase in volatility. When the market loses 125 points one day, then gains 112 points the next, only to drop 138 points after that, it’s a sign that traders can’t make up their mind about direction. They’re being whip-sawed by news and political events which is causing them to become more defensive. They’re rotating out of aggressive issues and into the more defensive stocks. We can see this in the Sector List.
But we can also see this in our Money Flow indicators, as they have remained relatively healthy for the past few days since the volatility began. So at least for now, money is not leaving the market. It’s just moving from one place (aggressive stocks) to another (defensive issues). If this rotation continues, the volatility will continue. It’s when the big institutional investors decide to stop buying and begin to sell that we’ll need to worry. But right now, all I’m seeing is a lot of rotation.
The rotation between sectors is also causing the patterns to morph. What once appeared to be a solid Major Wave 5 break out from the five month triangle for Major Wave 4 could be I the process of truncating. Yesterday, the Dow pulled back to the Upper Trend Line of the triangle, which is also where the 50 day moving average lies. So, there is tremendous support at that level (just under 25,000). As long as this level continues to hold, it’s likely that trading action we’ve seen the past week is just a correction within Major Wave 5 up, probably Wave 2 down. If this is the case, stocks should begin to rally hard within the next week or so. Otherwise, the top is already in.
My VTI-volume indicator on the Dow and NASDAQ remains on a neutral signal. The fact that this indicator remains neutral tends to support the Wave 2 scenario. If Wave 3 up is just around the corner, the VTI-volume indicator should turn positive signaling the next rally phase of the market is underway. So, watch the VTI-volume indicator and don’t fight it, especially if it happens to turn negative.
The Sector Ratio stayed at 12-12 neutral despite yesterday’s big decline in the market. The Strong Sector List remains defensive with FoodDrugs, Telecoms, Household Products, Foods and Transportation continuing to lead the List. The aggressive sectors like Technology, Computers, Semiconductors and Financials remain on the Weak List, near the bottom. As long as these ‘aggressive’ sectors remain on the Weak List, the market isn’t likely to go significantly higher. Remember, these sectors lead, and if they continue to weaken, they will take the market lower. On the other hand, even though the ‘technology/financial’ sectors are on the Weak List now, the Relative Strength of these sectors isn’t all that weak. So, if the market rallies during the next few days, these sectors could move to the Strong List in a heartbeat. If this happens, it would be a good sign that Wave 3 up is developing.
Same for gold and the metals. The Material Sector is still near the top of the Weak List and my combination VTI-volume indicator for gold and silver remains on a Sell Signal. Yesterday, gold and silver got hammered, with GLD dropping 1.88 to 111.19. Aren’t you glad you’re paying attention to the VTI-volume indicator? Remember, this indicator generated a Sell Signal on 15 June with GLD trading at 121.34. Continue to pay attention to the indicator, especially if it begins to turn positive. Gold could be approaching a historic Buy point.
That’s what I’m doing,
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