Weekend Strategy Review August 19, 2018
Posted by OMS at August 19th, 2018
The markets had a nice week, with all indexes moving higher. The Dow finished up 111 points on Friday, closing at 25,670. It was up 356 points for the week. The tech heavy NASDAQ was also up 10 points on Friday, but down 22 points for the week. The SPX was up 9 points on Friday, and up 17 points for the week.
This weekend I want to follow up on a few things I discussed on Friday. After positing the comments about the effectiveness of the VTI-volume indicator, I received and email from a new relatively student asking about how I use the indicator in my trading. Specifically, he wanted to know how I used it in combination with the other cockpit indicators. This caused me to do a lot of thinking, and because of this, I plan to restructure the cockpit to make things a lot clearer.
As most of you know, I started talking about the VTI-volume indicator about 18 months ago when I saw how effective it was compared to the other indicators I use. Immediately after this, I held a Class at UNF to introduce my students to the new indicator and posted a ‘strategy’ article on the web-site. Since then it has become my primary market timing indicator. I use it in combination with The Tide and the Strong Sector List to trigger trades in stocks and ETFs from my other Lists..
For example, when the VTI-volume indicator on the Dow turns positive, as it is now, I look for trades in the top sectors on the Strong Sector List. This is how I identified stocks like CVS in the strong FoodDrug sector. I saw the VTI-volume indicator the Dow turn positive on 5 July with the FoodDrugs in the top 5 Strong Sectors. So, I went to the Member’s Watch List and looked for a stock in the Food Drug sector. CVS looked like it had formed a nice basing pattern, so I bought it the following day when the VTI-volume indicator on the stock turned positive. Easy.
Seeing the VTI-volume indicator on the Dow turn positive told me it was time to get into stocks. The Sector List told me which sectors were the strongest, and the Member’s Watch List told me which stock was the strongest in the sector.
Anyhow, after thinking about the email I received, I decided to create another list of signals, separate from the existing cockpit indicators. These VTI-volume indicator signals would be for The Dow, NASDAQ, Gold, the Dollar, Bonds and Crude Oil. Having these signals listed in a separate table should help you understand which markets are moving up or down and which stocks to trade.
For example, if you see the VTI-volume indicator on the Dow move to a Buy Signal, you should focus on the Strongest industrial sectors. If the NASDAQ moves to a Buy, and Technology related sectors start moving onto the Strong Sector List, you might want to focus on tech stocks from the Member’s Watch List.
Same for Gold and the Dollar. These commodities tend to have an inverse relationship with respect to each other. So, when the Dollar is strong, gold is weak. We’ve also seen how this gold-dollar relationship impacts other currencies, like the Euro, and international stocks like Caterpillar (CAT). So, if you see the Dollar on a Buy Signal, you will know that CAT will probably have a tough time moving higher. Also, If the Dollar is strong, something like the inverse Euro ETF (EUO) would be something to consider.
I also want to include the VTI-volume indicator for Bonds and Crude Oil in the initial List. That’s because both are related to stock prices. For example, when Bonds are positive, it means that interest rates are ‘relatively’ low, creating a favorable environment for equities. Same for Crude Oil. When the price of crude is low, it leaves consumers with more money to spend on other items which pushes their stock prices higher. In other words, it’s all related. And once Dave modifies the cockpit, you’ll be able to see these relationships in one easy to read table.
For now, here’s where we are on the VTI-volume signals:
The Dow is on a new Buy. The original Buy was on 5 July with the Dow at 24,357. The original signal turned neutral on 10 August, telling us to be cautious, but it NEVER turned negative. Again, a neutral signal is not a Sell Signal. So, the original Buy Signal from 5 July is still in effect. And as of Friday, it’s back on a Buy.
The NASDAQ is Neutral. It too went positive on 5 July. But right now, it’s still Neutral. This is perfectly understandable, because if you look at the Strong Sector List, technology is nowhere to be found.
Gold (GLD) is still on a Sell Signal. But things could be getting ready to change. GLD was up 1.03 on Friday. The metals are EXTREMELY oversold at this point, and IF the VTI-volume indicator generates a Buy Signal in the next week or so, I’m a buyer. A big buyer!
The Dollar (UUP): Still on a Buy Signal, but the volume portion of the indicator is coming down quickly. IF the Dollar moves to a Sell Signal, this would be very positive for gold.
Bonds (TMF): TMF is still on a Buy Signal. But like the Dollar, the volume is starting to weaken. This is probably due to the rotation going on within the equity market. Like I said yesterday, money is NOT leaving the equity market. And it’s not going into Bonds. So, with these conditions, continue to look for higher equity prices, especially in stocks in the Strong Sectors. It’s when money starts to leave the equity market and into flows Bonds that I’ll start worrying. That’s not happening now. Also, if you see TMF generate a Sell Signal and the ETF gets replaced by TBT on the Dean’s List, you’ll know that interest rates are going higher. That’s not happening now. Interest rates, at least for now, are stable. The Buy Signal on Bonds (TMF) is telling you that.
Crude Oil: I have a problem here. I hardly ever trade crude oil. It’s like watching grass grow. So, I chose UCO, a 2X leveraged ETF as the vehicle. I also added UCO to the data base for the Dean’s List, so you can see how it compares to DIG, the oil and gas ETF. BTW, when I trade energy, I usually trade Chevron Texaco (CVX). The Buy/Sell Signals for CVX compare favorably with UCO. So, when you see UCO generate a Buy with DIG on the Dean’s List, it’s probably a good bet that CVX is going higher.
The Sector Ratio increased to 13-11 positive after Friday’s session. FoodDrugs, Telecoms, Household Products, Transportation, and Foods still lead the List. Technology was the sector that increased the Strong List by one. However, Service, Semis, Material, Energy, and Leisure still lead the Weak List. I would still like to see a few of these ‘technology’ sectors move to the Strong List. Once they do, look for the VTI-volume indicator on the NASDAQ to generate to a Buy Signal.
I’ve covered a lot this weekend. Hopefully, the new indicators will help simplify your stock selection and decision process. I look forward to any comments or feedback you may have on the new indicators.
Have a great weekend.
That’s what I’m doing,
BTW, to save some time every night, I plan to eliminate the Summation Index and the VTI on the Dow from the current list of cockpit indicators. The new table with VTI-volume indicators for the Dow, NASDAQ, Gold, Dollar, Bonds, and Crude Oil should be a lot more useful.
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