Weekend Strategy Review December 9, 2018
Posted by OMS at December 9th, 2018
The markets fell hard on Friday in what appeared to be wave ‘b’ down of an a-b-c wave sequence within corrective Wave 2 up. The Dow finished 559 points lower, closing at 24, 389. It was down 1,150 points for the week. The NASDAQ was down 219 points on Friday, and down 361 points for the week. The Dow and NASDAQ remain on long-term Weekly Sell Signals.
In Friday’s Comments I mentioned the Dow would likely fall to the 24,600 level to complete sub-wave ‘b’ down. The Dow actually traded as low as 24,285 before rallying, which tells me the large cap index is a lot weaker than I originally thought. It means that any retracement rally will now have a tougher time making it back to the 25,000 level, which was my original target for the final wave of the a-b-c pattern for Wave 2 up.
This means that I will now have to start looking for opportunities to short the market several hundred points lower from where I originally planned. So, if the market rallies early next week, I’ll be watching the shorter-term indicators closely, looking to establish a few trial positions.
Remember, one of the reasons I’m looking for this final rally is because IF the market rallies, it will confirm that the decline from the 3 December high of 25,980 into the 6 December low of 24,241 was Wave 1 down of Major Wave 3 down. And IF this decline is followed by an a-b-c retracement, I’ll be able to identify it as Wave 2 within Major Wave 3 down. So, any rally early next week will set the markets up for the next major move down, or in this case Wave 3 down of Major Wave 3 down. This is why I’ll be looking to get short. I love to trade wave 3s of a Major Wave 3 sequence. Wave 3’s are impulsive moves and pay$ to be on the right side of the indicators.
In Friday’s Comments I mentioned the Money Flow indicators on the Dow were still positive. Seeing these positive indicators was one of the reasons I believed the market would develop an a-b-c correction for Wave 2 before the markets developed a significant Wave 3 decline. So, I was watching the Money Flow indicators closely all day yesterday. They stayed positive, which tells me the markets should perform some type of corrective rally early next week.
Not so with much for the transports. They got hit hard on Friday with IYT dropping 7.5 points to 179.45. The Money Flow indicators on the trannies have been negative on the Weekly Chart for weeks and yesterday’s decline put the Daily CCI in the Trend Mode. So, any rally will likely be short lived. There’s not a lot of support for IYT until it reaches 167, which is where the 200-day moving average on the Weekly chart is located. BTW, I don’t expect the 200 to provide support for long, as the longer-term pattern, an Ending Diagonal, suggests a move down to 120 is likely. This is the reason I highlighted the trannies as a major short in my recent Class About Nothing.
Here’s the thing: IF the economy is slowing, transportation stocks are going to get hit hard. This simple fact is why Charles Dow was able to call the Market crash in 1929. He saw the transportation stocks diverging from the industrials, just as they are doing now. When I talk about the trannies having ALREADY entered their Wave 3 down, while the Dow Industrials are still developing their Wave 2’s…. that’s Classic negative divergence! You don’t need fancy indicators or algorithms to see this. Like I always say, computers and algorithms didn’t exist back in the 20’s. Heck, they weren’t developed for another 50+ years. But the analysts of the day still saw the crash coming. So, please be careful.
There are other signs. The Shiller P/E Ratio now stands at 29.54 after reaching a high of 34+ in October. This level is still the third highest level of the Ratio in the history of the markets. It was only exceeded in 1929 and 2000, and we all know what happened to the markets after that. BTW, a Ratio of 15-16 is considered normal. In other words, stocks are NOT cheap. They’re very expensive at these levels. If you look at this another way and assume that stocks are 50 percent overpriced, it means that IF the Dow starts to decline, it could fall to the 12,500 to 14,000 level before the P/E ratio is normalized. Scary huh? Well think about this…after the market crash of 1929, the P/E ratio fell to a low of 6! BTW, this is not the only time we saw P/E ratios this low. Since 1930, the Dow has traded with a P/E below 10 a total of six times! So, it’s not as if this is an unlikely event. If it happened once or twice, maybe. But six times? If the Dow falls a P/E level below 10, it could be trading below 9,000! OMG!! Do I see this happening? No! But I can easily see the Dow trading below 18,000 in the next 2-3 years. This will cause trillions of dollars to evaporate from the economy and lead to a severe recession, possibly even a depression.
Here’s another sign: The Sector Ratio fell to 1-23 negative after yesterday’s session. The only positive sector was Real Estate, and even this sector is not that positive with a RS Rating of zero. In other words, almost all 24 sectors of the S&P are negative. Hmmm? Do you still want to be trading this market to the long side? If you’ve been with me since I introduced the Sector Ratio, you know that the ratio was positive, sometimes extremely positive, since late February 2018. It was telling us the market was healthy and moving higher. Most of the time there were 18-20 positive sectors participating. But in early October, things started to change. The ratio turned negative and the market started to decline. The initial decline from 26,952 to 24,122 was Major Wave 1 down. The a-b-c rally into the 3 December high was Major Wave 2 up. And now with the Sector Ratio at 1-23 negative, both the wave count AND the Sector Ratio are telling me to get ready for Major Wave 3 down. I hope it doesn’t happen. But I don’t trade on hope. I trade on patterns, indicators, and Lists. And right now, everything I see is telling me to prepare for a major move to the downside.
Have a great weekend.
That’s what I’m doing,
Market Signals for
|DOW||NEG||06 Dec 2018|
|NASDAQ||NEG||07 Dec 2018|
|GOLD||POS||03 Dec 2018|
|U.S. DOLLAR||NEU||28 Nov 2018|
|BONDS||POS||19 Nov 2018|
|CRUDE OIL||NEG||23 Oct 2018|
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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.