Weekend Strategy Review November 23, 2014

Posted by OMS  at November 23rd, 2014

On Friday, China announced that it was lowering interest rates to stimulate its economy.  This was followed by talk of additional stimulus in Europe.  Hmmm?  Earlier last week, Japan announced that it was in recession.  In other words, some of the world’s major economies are showing signs of weakness.  If this is the case, it will only be a matter of time before this starts to impact the US economy and its markets.

The news from China caused US markets to gap higher at the open.  The Dow was up almost 170 points.  The other indexes saw similar percentage gains.  However by the time the markets closed, it was an entirely different story.  While the Dow closed up over 90 points for the day, the weaker NASDAQ and Russell 2K were only up slightly.

The fact that most indexes gaped open for the third time in the current rally and could not hold the gain was very interesting.  It is not unusual for an index to see several ‘gap openings’ during the ‘e’ wave of an Ending Diagonal Pattern.  A few weeks ago, I talked about the possibility of the gap that occurred on 31 October being a potential Exhaustion Gap.  It was not.  One of the reasons for this was the fact that the gap was not followed by a large Enveloping Candle or something similar.

Usually when the market starts to ‘gap’ higher, it does it in three phases.  The first gap is called the ‘breakaway gap’.  This gap occurred on the NADSAQ on 21 October.

The second gap is called the ‘measuring gap’.  It usually occurs near the half-way point of the move.  In retrospect, it now appears that the gap that occurred on 31 October was the measuring gap.

The final gap is called the ‘Exhaustion Gap’.  This gap occurs at the end of the pattern.  The candlestick that forms on the day of the gap is negative, reflecting a strong opening followed by severe weakness as the market cannot hold its gains.  This appears to be what happen on Friday.  The Exhaustion Gap will be confirmed IF the market continues the decline it started just after Friday’s open into next week.

It might not seem like Friday’s trading action was negative, but it really was. Looking at it another way, after the initial pop, the Dow traded down over 80 points from its high.  The NASDAQ actually filled its intraday gap, trading down 0.13 cents but closed 0.20 higher.  The Russell 2K saw similar weakness as it too closed its intraday gap, closing 1.65 points higher.  Make no mistake about it, Friday’s intraday pattern was not strong.

The reason all this is important now is because IF the market starts to turn negative early next week, it provides us with another well-defined downside target.  This is because after a series of three higher gaps, prices usually trade down to the initial ‘breakaway gap’.  On the Nasdaq ( QQQ) this target is near the 94.5 level.  On Friday, the QQQ closed at 103.87.

Anyhow, we should know soon enough.

The Dean’s List, PT indicators, and The Tide remain positive.  Until these indicators turn negative, it’s likely the markets will maintain their positive bias.

Most gold stocks and ETFs traded sideways to positive on Friday, continuing to develop what appears to be a small ‘Blade’.  Friday was the fourth consecutive day for GDX to trade just under its 50-day moving average.  If I’m right about the turn-around pattern, next week should see GDX make an assault on the 200 currently near 23.5.  If this happens, it will tell me a LOT about the next move in gold.

Also, several energy stocks are starting to appear on the Dean’s List.  Many of these, like LNG, CVI, DVN, and SLB have very nice patterns.  Several of the energy stocks that I follow have been beaten down as the market rallied. One of the reasons for the current rally is because the price of crude has fallen from over $100 per barrel to near $70.  I do not expect this to last.  As I have mentioned several times before, my longer term charts are still calling for significantly higher crude prices.  I’m not sure what will cause this, but the charts are telling me that the current ‘glut’ in crude oil is only temporary.  As long as energy stocks are on the Dean’s List with positive patterns and positive indicators, I have to remain interested in energy, especially for the longer term.

Next Thursday the markets will be closed for the Thanksgiving Holiday.  Because of this, I will only be providing my Comments on a limited basis.  My next regular posting will be on Tuesday, with a brief Update on Wednesday and the WSR next weekend.   I will continue to update all of the Lists and cockpit indicators, including The Tide, every night.  Also, IF something important happens that impacts the Lists or indicators, I will post Comments to keep you updated.

Meanwhile, I wish all of my students a Happy Thanksgiving Week.  This is a time when I like to relax and give thanks. It’s also a time when I like to enjoy my friends and family, especially my kids and grandchildren.  I hope you make time to do the same.

That’s what I’m doing,

h

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