Professor’s Comments July 1, 2016

Posted by OMS  at July 1st, 2016

The Dow had another 230 plus point day.  It actually closed up 235 points at 17,930.  Volume was moderate, coming in at 103 percent of its 10-day average.  There were 396 new highs and only 17 new lows.

Since the day Brexit voting started (last Thursday), the Dow has experienced six consecutive days of 230+ point moves for a total of 1,890 points.  During that time it only changed 81 points in total value.  On Brexit Thursday, the Dow was trading at 18,011; yesterday it closed at 17,930.  Amazing!   I fully expected that we would see a lot of volatility if Brexit happened, but 1,890 points in six trading days?  Wow!

Today is the first day of a new month, so most of the window dressing being done by the Mutual Funds should be complete and things should start to calm down.  In other words, the dominant patterns should start to take over.

Right now there are two major patterns in play.  The Dow appears to be completing a large Broadening Top Pattern where Monday’s low of 17,063 was the bottom of wave 4 down.  If this is the case, the Dow should re-test the April high of 18,168 before wave 5 up completes.  The S&P500 should rally to about the 2,120+ level to complete its Bearish Rising Wedge Pattern.  Yesterday the S&P closed at 2,099.

The cockpit indicators remain mixed. The Tide is positive but the Dean’s List remains neutral.  The VTI continues to move up, but still has a negative bias.  It is also showing NO Trend with the 2-period RSI in overbought territory.

The combination of the patterns and indicators tells me that we should be getting close to a top, but we’re probably not there yet.  With no trend in place and an overbought RSI, the markets will likely experience a small pullback before making another run up to complete the patterns.  A small pullback today would fit nicely within the overall corrective pattern.

One thing I noticed during the past week was that with all the volatility we’ve seen since Brexit, nothing has changed with respect to the Dollar.  It’s still strong, and the Euro is still weak.  Both UUP, the ETF for the Dollar and EUO, the inverse ETF for the Euro are still on the Dean’s List.  Eventually, once the dust settles in this volatile market, it will be this relationship that will determine what happens next to the various sectors of the market.   

As long as the dollar stays strong, we should expect bank stocks to remain weak.  Same for U.S companies doing business in Europe.  Remember, before Brexit, I said to expect a lot of volatility.  But I also said it would take time for the effects of Brexit to unwind.  Brexit is only the beginning.  Now that the vote has taken place, the parties will have two years to negotiate the terms and conditions for the British departure.  What we’ve seen during the past six days is only the initial reaction to an unexpected vote.  What will take place during the next two years should be much more predictable. 

Also, as long as the turmoil in Europe continues, gold should continue to push higher.  The past few days have seen all sorts of news headlines generated, as various European ministers make proposals on what a post-Brexit Europe will look like.

Yesterday I was fascinated to read an article where France and Germany would control Europe, with all the other countries giving up their armies in return for the protection of the Germans.  Hmmm?  I wonder how this would sit with the Poles?  I saw another that suggested two different Euro currencies; one for northern Europe and one for the south.  Hmmm?  If they’re going to do that, why not have separate currencies for each country?  Wasn’t this what countries did before there was an EU and an Euro? If the Greeks went back to the Drachma, they could get out of the ‘financial jail’ they are in with the Euro.

Anyway, my point is that all of this is going to take time to sort out.  And as this process takes place, there will continue to be a lot of volatility in the markets.  But in the meantime, I believe the Euro will continue to weaken against the Dollar.  And as long as this happens, U.S companies will continue to face strong headwinds in the international market place.  Gold and the Dollar will continue to be looked at as a safe havens.

In this environment, I still tend to favor the short side once the Dow and S&P approach their pattern targets.

That’s what I’m doing,

h

U.S. markets will be closed on Monday for the 4 July Holiday. 

Market Signals for

07-01-2016

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