Weekend Strategy Review May 13, 2018
Posted by Laurie Liessmann at May 13th, 2018
The markets closed the week with a mixed session. The Dow was up 92 points, at 24,831. It was up 569 points for the week. The NASDAQ was down 2 points on Friday, but up 193 points for the week. The markets broke out of their triangle pattern on Wednesday by exceeding the 24,600 level.
Several of the large cap technology stocks, like Apple (AAPL), have been on a tear recently, so it was not surprising to see them pull back and rest yesterday. The pullback was expected. However, stocks like AAPL and AMZN are now in the Trend Mode, so I wouldn’t be too concerned about them for now. Remember, once a stock enters the Trend Mode, we keep our finger off the Sell Button. Let the Trend do its work. It’s when a stock moves out of the Trend Zone that we start to worry. Not now.
On the other hand, most of the large cap stocks in the Dow are still not in the Trend Mode, so we need to see if this changes during the next week. On Friday, the VTI-volume indicator on the Dow remains on a Buy Signal, but the VTI portion of the indicator is still only 61.43. The 2-period RSI closed with an EXTREMELY overbought reading of 99.2, so without a Trend in place, the Dow could pullback next week. If it does, I would view the pullback as a great buying opportunity.
BTW, at this point, there are no guarantees that the market will experience a pullback. The recent breakout from the 4-month triangle is still showing significant strength and IF we get another day or so of positive action, the VTI on the Dow could join the 35-period CCI in the Trend Zone. If this happens, the rally will likely continue unabated.
Students should note how the Bollinger Bands on the Dow have narrowed while the Dow was forming its triangle. And now, since the breakout, the upward price movement is starting to push the Bands apart. The tube of toothpaste is being squeezed. The ‘squeeze’ could produce a lot more upside action, so give it a chance to do its thing. Whenever I see tight bands on an index, I like to hold stocks. It’s when the Bands begin to get to widen that I begin to worry. Not now. Now is when I’m looking to buy stocks that will participate in the ‘Squeeze’.
So, were am I looking for these stocks? Hmmm?
Let’s start with the Strong Sector List.
On Friday, the Sector Ratio improved to 18-6 positive. So, the Sector Ratio is telling me that the market is starting to roll. Last week, when the Ratio was 20-4 negative, I told you to be patient. But then early in the week, the Ratio started to improve. By mid-week, it was neutral, with the Semiconductors, Technology, Banks, Financial sectors joining Energy at the top of the Strong List. The leadership necessary to take the market higher was back. The Material Sector (with gold) also joined the Strong List, which is something I was waiting for.
So now with the leaders back, I’ve been buying a few select stocks from the Member’s Watch List. But before I talk about them, I want to mention something else. When I look at the Strongest sectors, I can see that Semiconductors, Energy, Healthcare, Technology, and Computers all have Trend Scores of 98 or higher. The rest of the Sector Trend Scores, even though they’re on the Strong List, are still significantly lower. Some, like the Telecoms and PharmaBio, have Trend Scores that are still negative. I don’t want to be in these Sectors. This is the time I want to be in the Strongest Sectors that are Trending. I don’t want to wait for a Sector to begin to trend when so many are already trending. This is what market leadership is about. The leaders are already moving higher. This is where I want to be.
So now that I know which Sectors are moving higher, I can begin to focus on a few stocks in those sectors.
For that I use the Member’s Watch List. But when I do, here’s something I look for. For example, we all know that Energy has been leading the Strongest Sector for weeks now. There are a lot of energy stocks near the top of the Member’s Watch List. But are these a good choice? Hmmm? Maybe, but If you look at the Bands, you will see that stock like CVR Energy (CVI) which has been at the top of the MWL for weeks, has pushed its Bands so they are wide apart now. Could it continue to move higher? Sure, but it was a better buy back in early April, when it had ‘tight bands’. Now, the Bands are too far apart for me. As another example in helping choose your energy stock, students should look at what happened recently with Petrobras (PBR), a stock with EXTREMELY tight Bands and a nice Hockey Stick Pattern. This is what you want to see: Tight Bands and a Hockey Stick Pattern. There are several on the MWL now. I like the Bands on Schlumberger (SLB).
Same for the semiconductor, computer, and technology stocks. Students should look at the Bands on INTC, MSFT, HPQ, and CSCO. Then compare these with a stock like AAPL which has wide bands after making a nice move higher.
Anyhow, you get the idea. Use the Sector List to identify strong sectors, then select stocks in these sectors with tight bands.
That’s what I’m doing,
Have a great weekend.
Market Signals for
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