Professor’s Comments August 25, 2017
Posted by OMS at August 25th, 2017
The markets were down mildly again yesterday. The Dow finished 29 points lower, closing at 21,783. The NASDAQ and SPX were down 7 and 5 points, respectively. Volume on the NYSE was low again, coming in at 95 percent of its 10-day average. There were 97 new highs and 33 new lows.
The markets finished with several mixed signals yesterday. This first is that the Hi-Low indicator, one of the key breadth indicators that make up The Tide, turned positive. This means The Tide has turned neutral. The Hi-Low indicator is the most sensitive of the breadth indicators and is usually the first to turn in any short-term market move. So, when it turns, we need to look for other clues that might support a short-term rally.
One clue was the type of trading action we got yesterday. Yesterday’s decline was NOT impulsive. It was more typical of what you might expect in a corrective wave sequence. Remember, going into yesterday’s trading, I was looking for an impulsive decline to signal the start of wave 3 down. That didn’t happen. So, it’s possible that the decline we’ve seen for the past few days is not the start of wave 3 down, but only wave ‘b’ down of an a-b-c pattern within corrective wave 2 up. IF this is the case, wave ‘c’ up could take the Dow back up to the 21,900-21,950 level before wave 2 up completes and wave 3 down begins. It’s a real possibility now that the Hi-Lo oscillator has turned positive.
There was another small change in the A-D oscillator last night. This small change signal is coming on the heels of yesterday’s ‘relatively small change’ signal of 12 points. This means that we need to really be on our toes for the possibility of a Big Move within the next 1-2 days.
Yesterday I mentioned that I would be watching the 217.84 level on the Dow Diamonds (DIA) to signal the start of wave 3 down. This level was broken relatively early in the session, but the decline stopped at 217.56 and was followed by an a-b-c decline to 217.46. An a-b-c decline is NOT the type of trading action one would expect IF wave 3 down is starting. So, it’s likely that the decline is something else…probable only wave ‘b’ down of wave 2 down.
Right now, I’m still long several inverse index ETFs, and I’m faced with the possibility of a 150 to 200 point rally before wave ‘c’ up of 2 up completes. Remember, we have two consecutive days of small change signals on the board, so a Big Move is possible. And Fed Chair Janet Yellen is speaking at Jackson Hole later today, which could easily trigger an out-sized move on the Dow. Hmmm? What to do??
Here’s a case where I’m going to use a few protective stops. If the market starts to advance, I’m going to step aside and not fight the rally. As a trader, I’d rather be out of the market and then re-establish my inverse positions from higher levels.
On the other hand, I’m NOT totally convinced that the market will rally. The reason I say this is because yesterday, the volume portion of my two- part VTI-volume indicator turned negative. This indicator turned positive on 26 July, which led to a 400+ point rally. So, the fact that it turned negative last night brings up the possibility that the market could also decline after Ms. Yellen’s comments. And IF this happens, I want to stay short. Thus, the need for protective stops.
I will still be watching the DIA today, only now yesterday’s low of 217.46 becomes the key number. Given yesterday’s a-b-c trading action, any decline below 217.46 now will likely announce the start of wave 3 down. But like I said, that decline MUST be impulsive. That’s the way to identify a wave 3.
Yesterday’s Sector Report remained weak, but the number of strong sectors increased to 6. The strong sectors include the Utilities, Material, Computers, PharmaBio and Financials. The Weak Sector List contained 18 sectors led by Consumer Goods, Service, Autos, Telecoms and Energy. The top weak sectors listed have RS ratings of -3 or -2. So, the Weak Sector List is still a lot weaker than the strong sectors are strong.
If you’ve been watching the sector ‘List’, you probably have noticed that it does not change much from day to day. Once the number of weak sectors start to outnumber the strong sectors, it tends to stay that way. Maybe the top sectors move a spot or two or exchange positions with other sectors, but the numbers on the overall List tends to remain the same. So, IF the market rallies during the next few days in wave ‘c’ of 2 up, I would not expect to see the List change that much in terms of numbers. It’s 18-6 negative now. If the market rallies, I would still expect it to stay negative IF wave 3 down is going to begin from higher levels. On the other hand, IF the market rallies hard and the List starts to turn positive, I’d become concerned that something else might be going on.
So, watch the ‘List’ and keep one eye on DIA 217.46.
That’s what I’m doing,
h
BTW, I’m still neutral on gold and the miners.
Market Signals for
08-25-2017
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | SM CHG |
DEANs LIST | NEG |
THE TIDE | NEU |
SUM IND | NEG |
VTI | NEG |
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