Weekend Strategy Review January 14, 2018

Posted by OMS  at January 14th, 2018

The markets finished the week with another major rally.  The Dow reached a high of 25,810 before closing at 25,803.  The Big Cap index was up 507 points for the week.  The NASDAQ and SPX were also up Big on the week, gaining 125 and 43 points, respectively.

Last week, with the Dow approaching my target of 25,300, I mentioned that it would likely push another 250-350 points higher.  I said this because the final wave of an Ending Diagonal Pattern usually produces a ‘through-over’ wave.  That put my target close to 25,650.  Friday’s rally pushed the Dow another 150+ points beyond that!

Looking at the indicators this weekend, there is still nothing in any of the indicators I monitor to suggest the current up trend in the market is over.  The only negative is the Ending Diagonal Pattern which suggests the markets are approaching an important top.  But like I said last week, the final wave of an Ending Diagonal can continue to rally.  And like the opera, it won’t be over until the fat lady sings.  Right now, the fat lady is still singing!

The only negative I saw after Friday’s trading was that the A-D oscillator fell slightly, and produced a ‘Small Change’ of 7.9 points.  So, we need to be on the lookout for another Big Move early next week.  BTW, the A-D oscillator produced several ‘Small Change’ signals in the past few weeks, and in most cases, the Big Move has been to the upside.  The only Big Move to the downside was 2-days after the Small Change signal on 27 December, the Dow dropped 118 points on 29 December.  That decline dropped the 2-period RSI to an oversold level of 25.3, which was a fantastic buying opportunity.  So, it should be interesting to see what happen now that the Dow is 150 points above my target.  Will the next Big Move down be another buying opportunity, or will it start to turn the indicators negative, telling us the Bull Market since March 2009 is over?

This is the real strategy question for this weekend.  How will we know? Hmmm?

The first thing we need to remember is that this is not a young Bull.  It’s old!  Since March 2009, the markets have risen in five waves.  Major Wave 5 up of that five-wave sequence started just after the Presidential Election in November 2016.  Major Wave 5 up also developed five-waves up, with the final sub-wave 5 of the sequence having started on 28 August.  So, this sub-wave is now almost 4 ½ months old.  That’s a pretty long time for a market to rise without seeing some type of correction.  So, the fact that the Dow has risen in five distinct waves, producing an Ending Diagonal for final wave 5, with a classic ‘through-over’ wave all tell me that we need to be on our toes.

But all the above doesn’t mean it’s time to sell …yet.  My combination VTI-volume indicator is still strong.  It turned positive on 29 August when the Dow was at 21,865.  For me, the fat lady won’t stop singing until this indicator turns negative.  I won’t turn off the lights in the Opera House until this happens.

Same for the Sector Ratio.  On Friday, the Ratio increased to 23-1 positive.  The only negative sector was the Utilities.  The Strong Sectors were led by Energy, Transportation, Material, Retail, and Cap Goods.  If you owned stocks in these strong sectors, you had a great week.  If you owned Utilities, you spent the week in the ‘House of Pain’.

I can’t say it enough.  Stay in stocks and ETFs in the strong sectors and avoid those in the weak ones.  It pay$.

Just remember, no stock, no matter how good, goes to heaven.  Stocks go to targets and this weekend, we’re 150 Dow points past mine.

With the Dow experiencing an impulsive rally of over 500 points this past week, I wanted to take some time and think about what it could mean.  Up until now, I have been assuming the current rally was part of final wave 5 of the five-wave rally that started back in November 2016, just after the Election.  But last week’s impulsive move higher and the positive indicators that continue to support the rally, might be suggesting that something else is happening.

Suppose last week’s impulsive move higher is a continuation of wave 3 of the rally and NOT wave 5.  If this is the case, the market can continue to push a lot higher.

How much higher?  Hmmm?  Well, it depends on where wave 3 up stops. 

Let’s suppose wave 3 up completes near the 26,300 level.  That’s another 500 points from Friday’s close.  Could be higher or lower.  But for now, we’ll assume wave 3 ends near 26,300.  Then if we assume that wave 4 drops the Dow back to the 25,000+/- level, final wave 5 up should take the Dow well past 26,300, possibly to 27,000 or higher.

If wave 3 up pushes beyond 26,300, the final target for the Dow could be even higher, possible 28,000+.

My point is that I can no longer ignore last week’s impulsive rally and the strong indicators that continue to support it. My combination VTI-volume indicator is still very positive. And with a Sector Ratio of 23-1, only one sector in the S&P (Utilities) is not supporting the rally.  This is what you usually see in wave 3’s, not wave 5’s, where many sectors begin to tire and throw in the towel.

The sector weakening that is characteristic of final wave 5 rallies, is simply not happening now. The current rally is way too strong. It’s starting to appear that the tax cut is giving new life to the Big Cap stocks, and the Elliott Wave count is morphing to reflect it.

Continue to pay attention to the indicators.  As long as the indicators remain positive, stay in stocks and ETFs in the strong sectors.

Remember, in The Professor’s Methodology, we don’t trade based on wave counts. We only use wave counts as guides or road maps. That’s because wave counts can morph into other wave counts. We base our trades on indicators, patterns and Lists, and right now, they’re all positive.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

01-15-2018

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