Weekend Strategy Review June 24, 2018

Posted by OMS  at June 24th, 2018

The markets finished the week with a rally.  The Dow closed 119 points higher at 24,581 after being up over 200 points intraday.  However, even with Friday’s rally, the Dow was still down 510 points for the week.  The tech heavy NASDAQ was down 20 points on Friday and down 54 points for the week.

Friday’s rally on the Dow appeared to be sub-wave ‘b’ up within Wave ‘e’ down.  Once this rally completes, it should be followed by an additional leg down (sub-wave ‘c’ down) which should drop the Dow below Thursday’s low 24,406.  Because the final wave of a triangle does not usually decline to the lower support line of the triangle, we should expect Wave ‘e’ down of the Major Wave 4 triangle to complete somewhere between 24,400 and 23,750.  Once Major Wave 4 completes, the Dow should rally to new highs as Major Wave 5 up unfolds.

From a strategy perspective, when I look at the trading action that has been occurring on the Dow since the beginning of the year, the first thing I see is a lot of down-up-down action.  This is the type of trading that occurs when a major triangle is forming.  So, before I consider anything else, I MUST make the triangle my #1 Scenario. 

The thing we know about triangles is that they are consolidation patterns.  They are not usually topping patterns.  Prices usually leave the triangle in the direction they enter the pattern.  So, in the current case, the direction should be up. 

We also know that triangles usually form in Wave 4 of a five-wave pattern.  So. IF the triangle that has been forming on the Dow since 26 January is corrective Major Wave 4 down, the next major wave should be Major Wave 5 up.  This wave should exceed the January high of 26,617, and possibly approach the 28,000 level IF Wave 5 up within Major Wave 5 up has a ‘through-over’ wave.  IF this happens, it would likely mark the end of the Bull Market that started in March 2009.

The above analysis is based on basic Elliott Waves theory.  But like everything else with markets, the one thing we know about Elliott Waves is that they can and do morph into other wave counts and patterns. So, we DO NOT rely on them completely. We use indicators and Lists.

And right now, the indicators and Lists are giving mixed signals.  The Tide, which we use to measure the breadth of the market, is neutral.  Of the four indicators that make up The Tide, the Hi-Lo indicator and the Up-Down oscillator are positive while the Summation Index and A-D oscillator are negative.  So, the breadth is mixed. This is what normally happens in a corrective wave sequence, like a Wave ‘e’ down.  It will be something to watch during the next week or so, because IF the breadth (The Tide) turns positive, especially if this happens AFTER the Dow makes another low, it will likely signal the start of the next Major rally leg.  So pay attention to The Tide.

Same for the VTI-volume indicator and DMI.  Currently, both of these key indicators are negative.  Usually this would be a major concern, but because The Professor algorithm has NOT confirmed the negative DMI turn, I’m really not that concerned about a major decline …yet.  I’m still thinking that any decline below 24,400 will be a Major buying opportunity, IF the decline stays above the 23,750 level.  All bets are off IF the decline falls below 23,750 level, as a drop below that level would destroy the pattern.

The other thing that has me thinking positive is the Sector Ratio.  On Friday, the Ratio increased to 17-7 positive.  That’s still very positive for where we are in the pattern.  It means that 17 Major Sectors of the S&P500 are still strong with 13 of them still in Up Trends.  This is NOT the type of trading action one would see if the market was about to take a major dive. 

The Strong Sector List continues to be led FoodDrugs, Retail, Healthcare, Media, and Consumer Products.  Students should note how the Strong Sectors List is mostly reflective of domestic products; products that are not being impacted by a potential trade war.  I would expect the content of this list to change dramatically when the trade war ends.  BTW, this ‘war’ should end soon.  It’s stupid!  Yeah, I know it’s one of the things that candidate Trump talked about before his election.  And yeah, I get it that he likes to keep his promises.  But he’s wrong on this one. A trade war with China is just plain stupid!  If the President is doing this to make a political point or as a negotiation strategy, then great.  But get it over with soon.  The potential trade war is casting a cloud over the markets and IF the President can achieve some kind of political win, even a small victory, and put it behind him, the markets will sky-rocket higher.  He should understand that IF the markets move higher, he will be perceived as a hero for taking on the issue of balanced trade.  But IF he fails in his efforts, and an actual trade war develops, the American people will never forgive him for putting the country into a deep recession.  All the great things he’s accomplished will be long forgotten.  The stakes are high.

BTW, on Friday, India joined China, Mexico, the EU, Turkey, Japan and others in announcing tariffs on U.S. goods and services in response to the President’s actions. This caused U.S. and Indian trade officials to schedule a meeting in New Delhi next week to discuss the trade spat.  Let’s hope cooler heads prevail.  We don’t need a trade war with the world!

Have a great weekend.

h

Market Signals for

06-25-2018

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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.