Weekend Strategy Review February 18, 2018

Posted by OMS  at February 18th, 2018

The markets finished options expiration week on the flat side. The Dow was only up 19 points on Friday, but was up 1,029 points for the week, closing at 25,219.  The Dow has now re-traced about 58 percent its decline since 29 January. The NASDAQ and SPX also saw nice rebounds this week, gaining 365 and 113 points, respectively.  The key words in this paragraph are re-traced and rebounds.  Notice I’m not saying anything about a new Bull Market.  I simply can’t…. yet.

One of the reasons why I can’t get too Bullish is because of what I’m seeing in Europe.  The patterns on most European indexes are negative.  Same for Asia.  The patterns are ugly.  The German DAX appears to have topped in late January after completing a multi-year Ending Diagonal.  The Weekly VTI-volume indicator on EWG, the ETF for Germany, has moved to a Sell Signal.  This is the first Weekly Sell Signal on EWG since 16 June 2017.  The last Weekly Buy Signal was on 28 July with EWG trading at 30.69.  The ETF rose to 35.87 after the signal.  Now it’s on a Sell, so we need to pay attention.  Remember, what happens in Europe does not stay in Europe. If European equities start to fall, the decline will impact U.S. markets.

Remember too that we have two possible scenarios in play this weekend:  One Bullish and one Bearish.  The Bearish Scenario has the Dow rising to about the 26,000 level in a Wave 2 retracement before falling.  This week, the Dow got as high as 25,432, only 600 points from its theoretical retracement high.  If the market is weak, and about to enter a Bear Market, there are no guarantees that the Dow must retrace to the 26,000 level.  The retracement high could be several hundred points less.

So, do I believe we’re starting a Bear Market?  No. The Weekly VTI-volume indicator on the Dow is still way to positive.  But it’s starting to act just like it did in the summer of 2007, when it went negative for about a month, then turned positive as the Dow went on to its final top three months later.  We could see something similar happen again IF the Bullish Scenario is occurring.

Right now, it’s still too early to tell.  We’ll need to watch the indicators during the weeks ahead, especially IF they start to weaken as the Dow approaches 26,000.

But right now, I’m not trading the Dow.  I’m trading Computers and Healthcare.  That’s where the action is.  With mixed indicators on the cockpit and the Sector Ratio at neutral 12-12, I’m just focusing on where I know the strength is.  My VTI-volume indicator remains positive for both sectors. On Friday, Cardinal Health (CAH) was up another 1.24 points.

Another thing I’m watching this weekend is energy.  Remember, it’s 17 February, so we’re coming into the time of the year (March-late May) when I love to trade energy.  Over the years, the energy trade has been extremely lucrative.  But right now, energy stocks like Exon-Mobile (XOM) and Chevron (CVX) are NOT showing the signs of life I would expect to see after getting clobbered during the late January sell off.  XOM dropped about 17 percent from its highs and has yet to experience even a dead cat bounce.  This is something I find very unusual in the stock.  But DUG, the inverse energy ETF, is still on the Dean’s List and Energy is still on the Weak Sector List, so I’m being patient.  But I’m watching.  My combination VTI-volume indicator is negative on both stocks mentioned, as it is on the energy sector.  If it turns positive on the stocks or the sector, I’ll let you know.

The Strong Sector List was led by Computers, Healthcare, Consumer Products, Household Products, and Banks.  The Weakest Sectors were Autos, Utilities, Transportation, Real Estate, and Energy.  With the Sector Ratio at 12-12, stay in the Strong Sectors and avoid the weak sectors.  So, while seeing Energy on the Weak List in mid-February is disappointing, I simply can’t buy it now.  I’m being patient.

I’m still on a Buy Signal for gold (GLD), but on a neutral signal for most mining stocks and GDX, the gold miners’ ETF.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

02-20-2018

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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.