Weekend Strategy Review March 26, 2016

Posted by OMS  at March 26th, 2016

The Dow rose 13 points on Thursday, closing at 17,516.   It was down 87 points for the week.  The NASDAQ was 5 points on Thursday and down 22 points for the week.

Ok, so where are we?

Well, it appears that the markets are starting to roll over.  All five waves of the Ending Diagonal Pattern on the Dow, including the ‘through over’ wave, appear to be complete.   But the major indicators that I use to establish short or inverse positions have not turned negative yet.  So except for a few small ‘trial’ positions, I’m still on the sidelines.

The way things started off on Thursday, I thought it might be the start of the impulsive decline I was looking for to start Major Wave 3 down.  However, the early decline was checked and the market rallied back to finish mostly unchanged.

The primary reason for this is the fact that the big institutions still have way too much stock in their bins to take the market down.  The Money Flow indicators are still positive.  Looking at the weekly Money Flow indicator on the NYSE and NASDAQ, I can see that institutional selling has started on both exchanges, but not to the point that it has significantly impacted prices.  This is exactly what the Big Boys want.  They want to move as much stock as possible into the hands of the small investors at high prices, before everyone realizes that prices are beginning to fall.

I had originally estimated that the market would start to decline around the Ides of March.  So far, it appears that the Dow, NASDAQ and RUT topped on 21 March.  But they really haven’t started to roll over in earnest yet.  We’ll need to give them a little more time.

As for my strategy, it’s still the same.  I’m just waiting for The Tide to turn negative.  This is what I always do.  I follow The Tide.

The last time The Tide turned positive on 16 February, the Dow rose 1,432 points.  If you bought a few DDMs, at the Tide turn, you had a pretty nice profit.  The DDM is a leveraged ETF that attempts to move at twice the percentage increase of the Dow.  So if the Dow goes up one percent, the DDM increases by two percent.  Sometimes it doesn’t increase by an exact 2:1 ratio because of slippage, but that’s what it tries to do.

But right now, I’m out of my DDMs, and I’m starting to establish a few ‘trial’ short positions using the DXD.  The reason I say ‘trial’ positions is The Tide is still neutral.  Only two of the four breadth indicators that make up The Tide have turned negative.  Also, DXD is not on the Dean’s List yet.  So I can’t get aggressively short.

I’m just being patient.

Right now I’m starting to plan what my portfolio will look like when The Tide turns negative.  I’m trying to decide how much money I will allocate to each of the various sectors that I want to trade.

For example, even though I believe the major indexes will start to decline, they probably won’t decline at the same rates.  With the NASDAQ and Russell 2K looking significantly weaker than the Dow, they could be hit a lot harder.  So I will likely divide the money I plan to allocate to inverse positions between these three indexes by buying shares of DXD, QID, and TWM as they start to appear on the Dean’s List.

But I want to save a few bucks for gold and energy too.  The chart on gold shows that it probably completed a Major Wave major 4 bottom in December, and has started its Major Wave 5 up.  Since its December bottom at 100, GLD has increased over 20 percent in what appears to be Wave 1 up of a five wave sequence.  The wave 2 pullback appears to be taking place now.  If I’m right about gold, the metal, it should pullback to under 1,200 on this wave, possibly to 1,150 or even lower.  But once the pullback is complete, it should rise to new highs as the final waves of Major Wave 5 up unfold.  It’s possible that gold could easily surpass the 1,700 level on wave 3 of 5 up and test 2,400 before all five waves are complete.

This is why I want to save a few bucks for my gold purchases.

Same for oil and energy.  Here’s the thing.  Right now there’s a large surplus in oil.  It’s everywhere.  And when I say everywhere, what I mean is that all of the storage tanks are full.  You can’t store oil on the ground.  So when the thanks are full, the price has to drop to get rid of it.  That’s why gasoline prices are below 2 bucks.  

But cheap oil isn’t in the best interest of the producers.  It puts people out of work and it impacts the budgets of the countries that produce oil.  So I don’t expect that prices will stay under $40 per barrel for long.  While the technical picture on the short term chart is clouded, the longer term chart says we should see oil back in the $60-75 range before long.  Then once prices stabilize near these levels, it should test the highs made in 2012 near $120, before testing the record high near $140 made back in 2008.  Folks, the thing you need to realize is that oil is cheap now!  Very cheap. It’s also artificially cheap because the Saudi’s are trying to drive American producers (frackers) out of business.

It’s not going to happen!  American producers simply have too much ingenuity and technology for that to happen.  With the new technology, American complanies have already learned how to be profitable with oil at less than $35 a barrel. In a year or so they’ll be able to extract oil for less than $30, maybe lower.  All the Saudi’s did by lowering the price of oil was force the American producers into developing more profitable solutions for extracting oil.  So now think about what will happen once the price of oil starts to rise? Suppost it just gets back to the $75 level? Oy where the rest of OPEC and the Russians want to see it at $96?. Suppose it gets back to where it was two years ag at $110?  Imagine what energy stocks will be trading at with these new profit magins? This is why I want to save a few bucks for my energy investments.

All I’m going to do is follow my ‘Sticks in the Sand’ for energy.  If DIG is on the Dean’s List, I’m gonna buy energy stocks like GPOR, MRO, and EQT.  When DIG drops off the List, and is replaced by DUG, I’ll stop trading energy.

So next week, after you’ve had a chance to spend some quality time with your family, you might to think about how you’re going to structure your portfolio once The Tide changes.

I sincerely hope you take some time to enjoy your grand-kids.

That’s what I’m doing,

h

Market Signals for

03-28-2016

FAQ

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.