Professor’s Comments January 26, 2017

Posted by OMS  at January 26th, 2017

The Dow rose 156 points, closing at 20,069.  Volume was moderate, coming in at 109 percent of its 10-day average.  There were 329 new highs and only 9 new lows.

The Dow finally closed above 20,000 and Wall Street celebrated. After weeks of waiting, Fox Business News finally got a chance to put on their hats.  But now what?

The pattern didn’t change.  The Dow remains in the overthrow wave of a large Ending Diagonal Pattern.  The pattern still suggests a top is near.  The negative pattern case is supported by Money Flow and volume indicators that are showing significant negative divergence.  Also, when you put yesterday’s rally under a microscope, about half of the rally was due to short covering, not new buying.  And even though the Dow had a strong rally day from a point perspective, only about 60 percent of the issues traded advanced.  In other words, the internals were not all that strong. On the positive side, the rally was enough to put the VTI on the Dow back in the Trend Mode, so until the indicators turn negative, the rally in large cap stocks will likely continue. 

Not so much with the small caps.  While the Russell 2K rallied hard yesterday, it has still not exceeded its 9 December high.  So, there is growing negative divergence between the Generals (large caps) and the troops.  The VTI on the RUT finished the day with a reading of 59.1, so small cap stocks are NOT in the Trend Mode.  The 2-period RSI finished with an overbought a reading of 92.1, so with no trend in place , small caps will likely be a drag on the overall market.

Yesterday’s Sector report was a little surprising.  Instead of increasing as one would expect on a strong rally day, the number of strong sectors decreased by 2 sectors. The report now shows 14 strong and 10 weak sectors, so the strong positive sector bias we saw last week is decreasing. This is something often seen at market tops as fewer and fewer stocks participate in the rally. The semiconductors, Banks, and Transports continue to lead, with Service, Retail, Foods, and PharmaBio lagging.  The Banks and Financial Sectors both had large positive Delta Trend Scores, so it’s likely these sectors will be the ones that push the Dow higher. If I were looking for a short-term trade, I’d focus on the Banks and Financials.

BTW, the market is now entering the end of month time period which has a strong positive bias. This should benefit equities into early next week.

Yesterday’s focus on equities caused gold to pull back.  Yesterday I mentioned that GLD would trade down to somewhere between 113 and 114 during its wave 2 retracement.  So yesterday, we saw GLD make its first low at 113.68, finding support near its 50-day moving average.  A Wave 2 correction needs two lows before the pattern is complete. Once I see the second low, I’ll start looking to re-purchase my gold shares.

That’s what I’m doing,

h

Market Signals for

01-26-2017

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