Weekend Strategy Review August 21, 2016
Posted by OMS at August 21st, 2016
The Dow fell 45 points on Friday, closing at 18,553. It was down 24 points for the week. The NASDAQ finished down 2 points on Friday and up 5 points for the week.
Friday’s early decline of 107 points was the Big Move suggested by Wednesday’s small change in the A-D oscillator. The decline was enough to turn The Tide negative. It also turned the VTI negative.
So where does this leave us this weekend? Hmmm?
Well, we still have mixed signals. The Dean’s List, the Money Flow indicators, and the DMIs remain positive. And as I said on Friday, with a positive Dean’s List, there still aren’t any inverse index ETFs on the List to trade. And with positive money Flow indicators, it will be difficult to get any significant downside momentum started.
We saw this on Friday when the Dow was down over 100 points. It looked like it was going to be an ugly day. But the buyers stepped in and the market recovered most of its early loses. This type of behavior will likely continue to occur as long as the money flow indicators remain positive. But at some point, probably in the next week or so, the indicators will turn negative and the selling will start.
This is what I want to talk about this weekend.
Here’s the thing. Most investors have become complacent with the current rally. They listen to what the Fed has been saying about interest rates and with an election coming, they don’t believe that there will be any changes until after the election. They’ve come to believe that everything about this market depends on the Fed. I don’t believe that for a minute. I believe the Fed is irrelevant!
I believe in patterns and indicators. And right now the current pattern is suggesting that a significant top is at hand. Several months ago, I said that the Dow would likely top near the 18,300 level. When that target was reached, I revised the target to 18,600 based on a small pattern within the larger pattern and the strength of the indicators. So far the Dow has reached a high of 18,668. I don’t see it going much higher. There’s way too much divergence in the breadth and momentum indicators for that to happen.
So in effect, if you’re still long this market, you are betting against pretty long odds. Especially when The Tide is now negative. Remember, the current rally was signaled on 30 June when The Tide turned positive with the Dow at the 17,930 level. Before that, it turned positive on 16 February with the Dow at 16,196 signaling a rally of over 1,650 Dow points. Now The Tide is negative.
The current pattern appears to be an Expanding Top, which is sometimes called a megaphone because of its shape. And while the upper target for this pattern is difficult to predict because there is no measuring stick, predicting the lower target is actually pretty easy. It’s where the pattern began. Actually, the real target for the pattern is the lower trend line of the megaphone, which is near the 15,000 level. But before that can happen the 15,500 level will need to be tested and breached. If the market starts to fall next week and moves below 18,400, it’s likely that the move to 15,500 has started.
In other words, we’re looking at a potential decline of over 3,000 Dow points from current levels. But here’s the real danger. If the Dow moves below 15,500 and then moves below 14,500, it sets up the real possibility of a decline to 10,500 level which is the October 2011 low. The decline to 10,500 will likely take a few years.
So with potential targets like this staring me in the face, I took a quick look at a few charts of some of the world’s stock markets to see what they’re saying. For example, the Tel Aviv 100 (Israel) currently has a Head & Shoulders pattern that suggests a 25 percent decline over the next year. Germany’s DAX which is trading at 10,600 projects to below 4,000 within the next 2-3 years. London’s FTSE now at 6,800 projects to 5,500 by year’s end, then below 4,000 in the next few years. You get the idea. Just about all of the world markets that I looked at are saying the same thing. Equities are in trouble.
And now The Tide is negative.
Yeah, the Dean and the Money Flow indicators are still positive. But IF these indicators start to turn negative during the next week or so, please be careful. Especially if the Dow starts breaking below 18,400. The potential downside targets are significant. So the current reward -risk ratio for this market is not very attractive. It’s why I’m still on the sidelines waiting for a few inverse index ETFs to appear on the Dean’s List.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for
08-22-2016
DMI (DIA) | POS |
DMI (QQQ) | POS |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEG |
SUM IND | NEG |
VTI | NEG |
All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments, Weekend Strategy Review