Weekend Strategy Review August 5, 2018

Posted by OMS  at August 5th, 2018

The Dow rallied for 136 points on Friday, closing at 25,463.  It was up 11 points for the week.  The tech heavy NASDAQ was up 9 points on Friday, and up 75 points for the week.  The broader SPX finished up 13 points on Friday, and up 22 for the week.  Overall, it was a good week.

Friday’s rally in the SPX broke above the 2830 level confirming that Wave 3 of Major Wave 5 up was underway.  The index closed on its highs at 2840. This is the level I talked about during the week when I outlined the Bullish Scenario.  So now that 2840 has been achieved, I would expect a slight pullback early in the week to about the 2835 level, for sub-wave 4 of the rally, before the SPX resumes its push toward 2860-2870 level, where sub-wave 5 of Wave 3 up should complete.  In other words, the market appears to be right on course for a re-test of the January highs, and possibly higher.

The thing I want students to note this week is how our indicators have performed during the recent Wave 2 correction.  For example, in the case of the Dow, my combination VTI-volume indicator generated a Buy Signal on 5 July with the index trading at 24,357.   So, with the Dow currently at 24,463, the large cap index is now up 1,012 points since the signal.  The important thing to note about the signal was that since it was generated, it never turned negative!  It turned neutral two times when the momentum slowed during the Wave 2 pullback, but it never turned negative.  It told longer term traders to stay invested.  It continues to tell them to stay invested.

The same indicator also generated a Buy Signal on the NASDAQ on 5 July.  The NASDAQ was trading at 7586.  It’s now at 7812.  The indicator turned Neutral on 20 July, warning that tech stocks were in trouble.  Five days later, Facebook crashed.  The indicator turned positive again on 1 Aug with the NASDAQ at 7707.  And as I said earlier, it closed at 7812 on Friday.  Bottom Line:  Pay attention to this indicator.

We’ve seen the same type of great performance from the Sector Ratio.  Going into the Wave 2 correction, the Ratio was extremely positive with values averaging 19-5 positive.  Then once Wave 2 started to unfold, the Ratio dropped to a neutral range, with values averaging near 13-11 positive.  The thing to note about the Sector Ratio was that it never turned totally negative. It maintained a Positive to Neutral bias. This was one of the reasons I thought the correction was a Wave 2 and not the start of the next Bear Market.  So again, pay attention to the Sector Ratio as the market moves higher. 

Same for the leadership.  If you’ve been watching the Sector Lists, you know that the defensive sectors have been at the top of the Strong List for the past few weeks.  Sectors like Food/Drugs, Consumer Products, and Utilities are NOT market leaders.  The institutions only buy them when they’re worried.  And with the Fed ‘unwinding’ their balance sheet, selling $30 Billion of assets each month, causing a tightening of the money supply, and a potential trade war with China, there’s a lot to worry about. 

But I’m not that worried.  At least for now.  On Friday, the Sector Ratio closed with a reading of 20-4 positive.  The Strong List is still being led by defensive issues like, PharmaBio, Consumer Products, Transportation, FoodDrugs, and Food.  BTW, students should understand that seeing the Transportation Sector on the Strong List is a very positive indicator for the American economy.  It’s tells us that consumers are in the spending mode and the things they buy must be moved.  And since the American economy is about 70 percent consumer driven, the economy remains healthy.  The only problem right now is that toothpaste and toilet paper stocks don’t do a lot for growth.  So, we need to see a change in leadership IF this market is going to move a lot higher.

Looking at the Strong List this weekend, that new leadership might be coming.  Semiconductors and Cap Gods continue to move up the List and are now just one notch below the leaders.  The Telecoms, Real Estate, Household Products, Retail, and Healthcare Sectors all have strong RS rankings, just behind the leaders. The Banks, Technology, and Autos are back on the List near the bottom.  So now, IF one or more of the ‘aggressive’ sectors start to move into the top 5, it should help push the Dow toward my target of 26,660+.

If the market pulls back early next week, I would view it as another buying opportunity.  Pay attention to the 2-period RSI.  In other word, whenever the market is on positive signals and in an Up Trend, I use the 2-period RSI to add to my positions.  That’s what Rifle Trading is all about.  The VTI on the Dow and SPX is in the Up Trend Mode.  The VTI on the NASDAQ is NOT.  So, focus on the larger cap stocks for now.

Stay in the Strong Sectors and avoid Weak Sectors like Leisure, Financials, Material, and Computers for now. If these Weak Sectors join the Strong List, consider buying an a few broad based index ETFs for the final ride up. 

BTW, I still don’t like Facebook.  Never did.  Also, I have a lot of data that shows when a stock like FB crashes, it’s usually not a good time to buy the stock. A stock that drops 15-20 percent in one day usually has more downside to go. If you like FB, you might want to be patient for a better buying opportunity. My VTI-volume indicator on FB remains on a Sell Signal. 

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

08-06-2018

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