Weekend Strategy Review May 6, 2018
Posted by Laurie Liessmann at May 6th, 2018
The markets closed the week on a positive note. The Dow rallied for 332 points, closing at 24,263. It was down 49 points for the week. The NASDAQ was up 121 point on Friday, and up 90 points for the week.
Friday’s continuation rally after Thursday’s intraday reversal was impulsive. It was the kind of rally that could be associated with the start of Wave 1 up of Wave 5 up. We won’t know until the Dow performs a ‘Rope Jump’ by moving above 24,432, which is where the 50-day moving average is currently located. So, first things first. We need to see a Rope Jump. After that we need the Dow to breakout from the large triangle its been forming since 26 January. A move above 24,600 would confirm the breakout and that Major Wave 5 up is underway. From an overall strategy perspective, that’s where I will start becoming aggressive.
Right now, it still too risky to be buying anything but a few ‘trial’ positions. BTW, Friday’s big rally produced another Cigar Day for me. But even though the markets were up big, I exited my trades at the close, mainly because the rally was not enough to produce a Buy Signal from my combination VTI-volume indicator. For now, the indicator is on a neutral signal.
Also, Friday’s rally left the 2-period RSI with a reading of 84.3. So, the Dow is overbought with NO TREND in place. With these conditions, the Dow should pull back early next week. I will use any pullbacks to establish additional ‘trial’ positions. Remember, IF the Thursday – Friday rally was part of Wave 1 up, this wave should be made up of five sub-waves. So once sub-wave up is complete, we should see retracement sub-wave 2 down begin to develop. Like I said earlier, IF this retracement sub-wave occurs, I will use it to establish additional ‘trial’ positions, getting more aggressive as the market moves higher.
Basically, we have an ideal set-up going for us now. The triangle pattern suggests Major Wave 4 is nearing completion and Major Wave 5 up is about to start. The lower trend line of the triangle, near 23,500, has given us a nice support line to trade off of. A downside break of the this lower trendline would be cause for concern, but as long as it holds, the odds are high that the markets will rally to new highs once the breakout from the triangle occurs.
The other thing I want to see is improvement in the Sector Ratio. This weekend, the Ratio remains at 20-4 negative. That’s still way to weak for me to become aggressive. I don’t care what the wave count and the pattern suggest. I want to see the Sector Ratio start turning positive before I put a lot of my money at risk. Yeah, its fun to scalp a few stocks on an intraday basis. But for me to do any serious buying, I MUST see a positive VTI-volume indicator AND a positive Sector Ratio. Right now, I have neither.
So, I continue to wait. I’m just being patient.
That’s my strategy for this weekend.
Without positive indicators, I can’t use the Strong Sector List to help me select strong stocks and ETFs from the Dean’s List and Member’s Watch List. Remember, everything in my Methodology starts with the Tide turning positive. And this weekend, only 3 of the 4 breadth indicators are positive. The Up-Down oscillator is still negative. If all four breadth indicators turn positive next week, I’ll start using the Strong Sector List to help select the stocks I want to buy for the next run-up. But I can’t do that yet because The Tide hasn’t turned yet. So, I’m waiting.
Also, while Friday’s rally was nice, the Professor algorithm only had 32 stocks highlighted. Those 32 stocks were still short of the 50 longs required to tell me a serious rally is starting.
So, given Friday’s rally after the Jobs Report, and a pattern that suggests it was likely only sub-wave 1 of Wave 1 up, I would not be surprised to see the market pull back next week as sub-wave 2 develops. If this happens, we should start to see a small Hockey Stick develop. The ‘Blade’ of the Hockey Stick is what should provide the energy to enable the ‘Rope Jump’. This is why I’ll be looking to buy any pullback next week.
Have a great weekend.
That’s what I’m doing,
BTW, the four strong sectors were Healthcare, Energy, Utilities, and Leisure. Forget about the weak sectors for now. Now is the time when you should be focusing on strength. Pay attention to any changes in the Strong Sector List this week. It will be these sectors that will lead the market higher.
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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.