Weekend Strategy Review February 29, 2017
Posted by OMS at February 19th, 2017
The Dow fell 88 points early, then clawed back to finish up 4 points, closing at 12,624. It was up 355 points for the week. The NASDAQ finished up 24 65 points on Friday and up 104 points for the week.
Friday’s trading action caused the Dow to close below its Upper Bollinger Band generating a Sell Signal for that index. So now all four of the major indexes are sitting on Bollinger Band Sell Signals.
Friday’s action also cause the Hi-Lo indicator to turn negative. The Hi-Lo indicator is one of the four breadth indicators that make up The Tide. The three other breadth indicators were also weakened considerably by Friday’s trading, but still maintain their positive bias. However, the A-D oscillator now has a reading of only 6.28. In other words, if Tuesday is a down day, the odds are that the A-D oscillator will also turn negative. This would mean that most stocks on the NYSE are in down trends. This would be something to think about in a market making new pattern highs.
The Shiller P/E ratio hit 29.14 on Friday. Just before Black Friday, 1929, the P/E ratio hit 30. Stocks are NOT cheap!
Last week, I commented that the market appeared to be on a sugar high, pricing in a perfect scenario of lower taxes and future growth. I also said that the indicators suggested higher prices. That’s what happened; the Dow was up 355 points for the week.
But there was a Phi Mate turn date on Thursday, 16 February, and now all 4 of the major indexes are on Bollinger Band Sell Signals. Bollinger Band Sell Signals are not the most reliable signals, but when the breadth indicators start confirming them, it’s time to pay attention. That’s where we are this weekend. The breadth indicators are starting to turn.
The pattern also suggests some type of top has arrived. Given that the Dow has rallied hard since 7 February, it’s likely that the rally was impulsive Wave 3 of a five-wave sequence. So, it’s likely that the pause we saw late in the week was the start of Wave 4 down.
Wave 4’s usually take the form of a triangle, so it’s likely we’ll see a lot of choppy trading for the next 2 weeks or so until all five waves of the triangle play out. Looking at Wave 2 of the current pattern, (the move down from 1/26 to 1/31), it only took 3 days to complete. So, IF the Principle of Alternation holds, Wave 4 should be about twice as long. Also, the Wave 2 correction was simple, so Wave 4 should be complex. In other words, we should see a five-wave triangle develop during the next week or so. After that, it’s likely the markets will push even higher to complete the Ending Diagonal Pattern.
Gold pulled back on Friday, continuing to form the ‘Blade’ of its Hockey Stick Pattern. All the indicators I monitor continue to suggest higher prices. The 50-day moving average on GLD continues to rise, but is still not above the 200. It’s likely that gold (the metal) will not start impulsive Wave 3 up until the 50 crosses above the 200. Be patient.
Yesterday’s Sector Report showed 20 strong sectors and only 4 weak. The Transports, Semiconductors, and Banks continue to lead, with Service, Foods, and Telecoms lagging. Since early November, except for a handful of days, the Semis, Transports, and Banks have been leading the market, and especially the Dow higher.
Energy stocks had another bad day on Friday, with DIG dropping 0.40 cents to 39.28. The VTI on DIG now has a reading of 27.6, so the ETF has entered the Down Trend Mode. The 2-period RSI on DIG is now showing an oversold reading of 6.8, so it’s possible the ETF could bounce early next week. If it does, I’ll be watching to see if the bounce can lift the VTI out of the Down Trend Mode. This will need to happen in the next week or so if we’re going to have a decent energy trade this yea
Last year’s energy trade with DIG produced a nice profit. The VTI on DIG turned positive on 2/22 with the ETF trading at 27.32. The ETF got as high as 39.26 on 6/8 before the indicators started to turn negative. It was just another example of why I always look to trade energy in March-April.
BTW, I’m also looking into developing a ‘Sticks in the Sand’ Strategy for trading natural gas. With all the fracking going on in this country, a favorable energy policy in Washington, and the Panama Canal now open to natural gas super tankers, I believe that the export of U.S. natural gas is going to be a huge business opportunity in the future. Right now, my DIG vs. DUG energy strategy does not focus specifically on natural gas. There is some correlation between the trading vehicles I would like to use, but to be honest, the correlation is not what I would like it to be.
For example, most of my students know all about my ‘China has to Eat’ Strategy where every time I see IYT, the transportation ETF on the Dean’s List, I trade CNI, my favorite railroad. There is very good correlation between the two issues, but the percent profit is usually a bit more when you trade the railroad. Also, with the Transports leading the Sectors higher since November, students should take a quick look at what happens when something like IYT is on the Dean’s List at the same time the Sector report is saying that Transportation is one of the three strongest Sectors. It makes for a pretty cool trade.
Anyhow, I want to develop a similar strategy for trading natural gas. If you are interested in this trade, and have a particular stock or ETF that you follow, please let me know so I can evaluate its correlation. One obvious choice is Cheniere Energy (LNG), but surprisingly, it does NOT correlate well with the U.S. Natural Gas Fund or DIG/DUG. So please send me your natural gas inputs and I’ll try to figure it out.
U.S. markets will be closed Monday, 20 February, for the President’s Day Holiday.
Enjoy the long Holiday weekend.
That’s what I’m doing,
h
Market Signals for
02-21-2017
DMI (DIA) | POS |
DMI (QQQ) | POS |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
SUM IND | POS |
VTI | POS-T |
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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.
Category: Professor's Comments, Weekend Strategy Review