Professor’s Comments August 18, 2017

Posted by OMS  at August 18th, 2017

The markets fell hard yesterday.  The Dow shed 275 points, closing at 21,751. The NASDAQ and SPX fell 123 and 38 points respectively. Volume on the NYSE was moderate, coming in at 101 percent of its 10-day average.  There were 53 new highs and 145 new lows. 

Yesterday’s decline appeared to be the start of wave 3 down.  For the past few days, I have been talking about how the Dow has fallen in five waves down and rallied in three waves up since its 8 August high.  This wave count suggests the primary trend has shifted to down.

So yesterday, I mentioned that if the market starts to head down, the decline should be impulsive.  Wave 3’s are always impulsive.  Once they start down, they continue down.  And that’s what we saw yesterday.  That’s why the Dow dropped 275 points.

OK, so now we’re starting to get a pretty good idea about what we’re likely dealing with.  Since April, the markets have risen in what appeared to be the fifth wave of an Ending Diagonal Pattern. This final fifth wave was the fifth wave of another larger Ending Diagonal Pattern that started on 7 November 2016.  Both patterns appeared to have completed with the 8 August high of 22,178 on the Dow.  That’s why when I saw the five waves down followed by three waves up, I was concerned that the primary trend was shifting.  Yesterday’s impulsive decline added to that concern.

From the above, it appears that the markets have started the initial stages of the next Bear Market.  If I’m right, this Bear could last for years.  Yeah, there will be rallies along the way.  Rallies in a Bear Market are always substantial because a lot of traders establish large short positions.  Then once a rally starts, they race to cover those shorts and you get a hard rally. But overall, the direction will be down.

How far down can we expect?  Hmmm?  Well, my initial target for the Dow is the 19 April low of 20,380.  This is where final wave 5 up of the small Ending Diagonal Pattern started.  The target for an Ending Diagonal is ALWAYS where it began.

After that, my second target is the 4 November low of 17,884.  This is where the larger Ending Diagonal started. 

After that, we’ll just have to see how the decline develops, but based on what I’m seeing now, it’s likely the Dow will be trading at significantly lower levels 2-3 years from now.  I can easily make a case for the January 2016 low of 15,450 to be tested and broken.

But these levels will not be seen in the immediate future.  It will take time. If you’re still holding long positions now, you might want to review these positions after yesterday’s decline. The odds for the markets to experience another major rally have now turned against you.

The one thing we know about declining markets is that they never go straight down.  They go down in waves. 

So, after yesterday’s 275-point decline, which appeared to be wave 3 of Major Wave 1 down, we know that after wave 3 down completes, the Dow will likely rally in wave 4 and then decline in wave 5.  After all of five waves of the decline are complete, the Dow should be trading near 20,400.

OK, so where are we now?

Yesterday’s decline caused the Dean’s List to turn negative.  All four of the inverse ETFs for the major indexes are now on the List.  This is occurring while The Tide is negative.  When The Tide turns negative, I start looking for inverse index ETFs to Buy as they appear on the Dean’s List.  Now I have four to choose from.

But after yesterday’s 275-point decline, the markets are oversold.  I never like to buy oversold markets, unless they are trending.  If the market is trending, I’m forced into buying because the trend will likely take the market even lower.  But this hasn’t happened yet.  After yesterday’s decline, the VTI on the Dow is only 66.3.  So, it still has a positive bias (above 50 is positive).  And yesterday’s 2-period RSI finished with an oversold reading of 10.3. In other words, the Dow is oversold without a trend in place.  This condition usually leads to a small bounce.

BTW, the VTI on the NASDAQ is showing similar conditions.  The VTI is 44.9, so it has a negative bias, with a 2-period RSI of 12.9.  Once again, oversold with No Trend.

Yesterday, the QQQ finished at 141.33, the low for the day.  The thing to watch now is the 10 August low of 140.89.  If that low is taken out, it should lead to significantly lower prices.

Thursday’s Sector Report was downright ugly.  The number of strong sectors fell to 4 while the number of weak sectors increased to 20.  The four strong sectors were Utilities, Materials, Computers and Insurance.  The only Sector with a RS rating of 1 was the Utilities; all the rest were zero.  The Weak Sector List was led by the Telecoms, Service, Energy, Healthcare and Autos. The relative strength of the top 4 weak sectors was -4, with the Autos showing an RS value of -3.

If you have been paying attention to the Sector List, you have seen how it has changed during the past few weeks, going from strong to weak.  It’s been a great tool that not only told us the market was weakening, but it also identified the weak sectors to trade.  If you have time today, please look at some of the stocks in the Energy, Healthcare, and Auto Sectors.  The Weak Sector List has been telling us to avoid these sectors (and stocks in these sectors) for months.  More recently, we started to see the Telecoms and Service Sectors appear on the Weak List.  Please look at how these sectors have performed (declined) during the past few weeks.

So, if you are trading an individual stock, and you see the stock’s sector appear on the Weak List, please be forewarned.  And now, with 20 sectors appearing on the Weak List, maybe the List is trying to tell you something.  It’s telling me to start looking for opportunities to get short.

That’s what I’m doing,

h 

Market Signals for

08-18-2017

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