Weekend Strategy Review June 30, 2019
Posted by OMS at June 30th, 2019
The markets rose mildly yesterday. The Dow finished with a gain of 73 points, closing at 26,600. The Dow was down 119 points on the week. The NASDAQ was up 38 points on Friday, but down 25 points for the week.
Traders seemed to be waiting to see if the G20 Summit in Japan this weekend would produce a trade deal between the U.S. and China. While there’s little hope for a full deal immediately, the best chance is for a truce that would avoid new tariffs and calm tensions. The biggest sticking point is that Beijing probably won’t agree to any deal unless Washington lifts its ban on Chinese telecoms firm Huawei. And because this is tied to the security of our new 5 G networks, it’s probably going to take more than a handshake during the weekend to fix it.
On the downside, things could begin to get ugly, quickly if things don’t go well and President Trump decides to implement the $325 billion in new levies he has threatened. These tariffs are in addition to the $200 billion already in place. So, the stakes are high, and any mis-steps could spell trouble.
From a technical perspective, the Chinese market has lost over 30 percent during 2018. It recovered about 2/3 of the loss in early 2019 but is now headed back down again. The bounce into April appears to be wave 2 up within Wave 3 down. So, from a purely technical perspective, the chart is saying that the China’s market decline will continue with the Shanghai Composite making lower lows later this year and into 2020. In other words, the charts are not looking for any positive development on trade anytime soon.
Climate change is another issue on the G20’s table and is sure to be another sticking point between the U.S. and European leaders. The current administration appears committed to withdrawing from the Paris climate agreement, so I don’t expect much agreement here either. BTW, the charts on most European markets are also starting to look weak. The German DAX is currently forming the right shoulder of a classic H&S Pattern. This is a long term pattern that suggests the DAX is getting ready to decline from current levels near 12,250 to below 4,000 within the next 2-3 years. That 4,000 level is no typo! The charts for other European markets have similar patterns. The indicators on these charts are still OK for now, which suggests the current rally could continue for a bit longer. But come fall, especially if the indicators begin to turn negative, I’d really want to protect any money I had allocated to international investments.
So, with the longer term picture beginning to look negative in China and Europe, it’s hard for me to get excited about the U.S. markets. What happens in China and Europe will impact our markets. And while the charts for our markets are still looking OK for now, they are forming topping patterns that should come into play anytime between now and the end of the year.
I still believe the Dow has a good change of hitting 27,000, maybe a bit more in the months ahead, but after that it will be time to start preparing for some stormy weather.
On Friday, the market timing indicator for the Dow turned Positive again joining the NASDAQ and SPX on Buy Signals. The Russell 2K remains on a Neutral Signal.
The volume portion of my VTI-volume indicator on the Weekly chart of the Dow turned negative after turning positive last week. The last time this indicator turned negative was on 3 May, which led to a 2,000 point decline in the Dow. In other words, even though the market timing indicators on the indexes on the Daily charts are mostly positive, the same indicators on the longer-term charts are not that rosy.
The Tide and the Dean’s List are both positive. The DMIs for the Dow and NASDAQ remain positive while the Money Flow indicators on the same indexes are negative. Overall, the indicators remain mixed, but continue to improve.
The Sector Ratio strengthened to 13-11 Positive after yesterday’s session. The Strong Sector List was led by Insurance, Household Products, Healthcare, Telecoms and Media. The Weak Sector List was led by Service, Retail, Energy, Autos, and Transportation.
The transports rose again yesterday and are now overbought. The 2-period RSI on IYT, the Transportation ETF is now at 91.2. If the Dow continues to rally, students should watch the transports as they continue to develop the right shoulder of what appears to be a classic H&S Pattern. IF the trannies don’t advance from current levels and begin to break down, IYT should begin to test the ‘neckline’ of its H& Pattern near the 176 level. Anything below 176 would spell trouble for the transports…and the overall market. The trannies and the home builders are the sectors students should be watching now. They will tell us more about the health of the economy than any Fed action or G20 meeting in Japan.
On Friday, I continued to scalp trade the home builders to the short side. For the past 3 days, PHM has traded near its 50 day moving average as it forms the ‘Blade’ of a small Hockey Stick Pattern. Friday’s low was 31.46, so IF that low is broken, watch for a decline to 30.82. This will be the real test for PHM, because IF this level is broken, the stock should fall to the 200-day moving average near 29.03. Here’s the deal: I’m not watching or trading PTH at this point because I want to make a profit. I’ll take a profit if the stock declines, but the real reason I’m watching-trading PHM now is because I want it to tell me what’s happening with the economy. If PHM begins to break below 29.03, it will give me all the information I need to know. BTW, the volume portion of my VTI-volume indicator on the Weekly chart of PHM turned negative on Friday. This is the first time the indicator has been negative since November 2018. Watch the home builders!
Model Portfolio: There were NO CHANGES to the Model after yesterday’s session. The Model still holds 1500 shares of TWM, the Ultra Short (3X) inverse ETF for the Russel 2K. IF the timing indicators turn negative, the Model will likely sell its shares. The Model is also considering hedging its negative position in TWM by purchasing a few shares of DDM or QLD if the outcome of the G20 summit produces a positive result on trade.
After yesterday’s session, the Model is up 16.7 percent. This translates to an annualized gain of about 58 percent. The Model continues to hold most of its assets in cash, waiting for high probability opportunities to put the cash to work. Right now, with mixed signals on the cockpit, the odds are not favorable to have a lot of money on the table.
The Model Portfolio is being shown for educational purposed only. The Buy/Sell actions in the Model Portfolio are made based on technical indicators that can and do change frequently and should NOT be considered as recommendations for trading an actual portfolio. Any gain or loss in the Model Portfolio should not be used to predict future performance of the Model.
Have a great weekend.
That’s what I’m doing,
Market Signals for
|DOW||POS||28 Jun 2019|
|NASDAQ||POS||13 Jun 2019|
|GOLD||POS||03 Jun 2019|
|U.S. DOLLAR||NEU||14 Jun 2019|
|BONDS||POS||19 Jun 2019|
|CRUDE OIL||POS||26 Jun 2019|
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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.