Weekend Strategy Review October 1, 2017
Posted by OMS at October 1st, 2017
The Dow rose 24 points on Friday, closing at 22,405. It was up 56 points for the week. The NASDAQ finished up 43 points on Friday and up 69 points for the week.
Not much changed on Friday, or during the week for that matter. It still appears that the markets are in the process of completing the final waves of their topping patterns. The Dow got the small pullback to the 22,250 level I expected to complete sub-wave 4 of minor wave 5 up. It now appears the large cap index is in sub-wave 5 up and should complete the pattern somewhere above current levels.
The exact level where the Dow will complete sub-wave 5 up cannot be determined. The final wave of an Ending Diagonal Pattern can have a ‘through over’ wave or it can truncate. That’s why we need to pay close attention to the cockpit indicators now. As long as the indicators remain positive, the Dow will likely continue to push higher.
I want to talk about the indicators this week, because they will be of EXTREME importance in the weeks ahead. I can’t emphasize this enough. Specifically, I want to about the A-D oscillator.
That’s because there was another small change in the A-D oscillator on Friday, the fifth in a row. In all my years of trading experience, I have never seen anything like this this occur. A flat A-D oscillator means there is a great amount of ‘malaise’ in the markets, something that usually leads to an out sized move. The move could be up or down, so be prepared.
One of the things I wondered about after seeing five consecutive days of a flat A-D oscillator was did anything similar to this occur before the market crashed in 2007-2008? Or in 2001-2002. I also checked the crash in October 1987. The answer is NO!
Before the first leg of the 2007 ‘crash’, there were several times where the oscillator produced clusters of small change signals, but the Dow always pushed higher after the signals. The rise to the October top was characterized by almost two months of strong A-D oscillator readings, very similar to what we’re seeing now. But just before the ‘crash’, the A-D oscillator readings started to decline significantly. It was a warning. Then once the oscillator turned negative, the market started to crash.
This makes sense, because the A-D oscillator tracks the number of stocks on the NYSE that are advancing vs. those that are declining. When the A-D oscillator is positive, more stocks are advancing than declining. So the market can’t ‘crash’ as long the indicator remains positive. This is why I include this important breadth indicator in The Tide. And right now, all four indicators in the Tide are positive.
In April 2008, just before the second ‘crash’ wave’, there was a four-day cluster of small change signals that were slightly greater than the 10 points that I normally use to define a small change. The Dow did pull back (about 200 points) for a few days after these signals, but went on to gain over 600 points in the month that followed. The big difference between what I’m seeing now and in 2008 is in the values of the A-D oscillator. In 2008, the readings were significantly higher than they are now. The readings prior to the 2008 ‘crash’ averaged over 170. Now they’re only averaging about 65-70. An A-D oscillator reading above 150 is generally considered to be overbought. A reading above 200 is EXTREMELY overbought. So if you just consider A-D oscillator readings, they are certainly NOT overbought and they are definitely NOT negative. The fact that they are NOT overbought suggests the market can push higher, especially if you look at what happened in 2001 and 2007/2008. The fact that they are NOT negative is also important, because the two crash waves that occurred in 2007 and 2008 only occurred AFTER the A-D oscillator turned negative.
Looking at the 2001 ‘crash’, there were several 2-3 day clusters of small change signals in May, just prior to the major down turn, but once again, the real decline didn’t start until AFTER the A-D oscillator turned negative. And once again, the average A-D oscillator reading was a lot higher than it is now. Most cluster readings were above 130, about twice what we’re seeing now.
Bottom Line: Pay attention to the A-D oscillator and The Tide. As long as these indicators remain positive, the Dow and SPX should continue to push higher. On the other hand, IF these indicators turn negative, you might want to start managing your money..
Have a great weekend.
That’s what I’m doing,
h
BTW, Friday’s Sector Report was basically unchanged. The Sector Ratio fell slightly to 16-8 positive. The Strong Sectors continue to be led by the Semis, Specialty Banks, Energy Transportation, and Cap Equipment. The Weak Sectors are led by Household Goods, Telecoms, Consumer Products, Healthcare, and Media.
Market Signals for
10-02-2017
DMI (DIA) | POS |
DMI (QQQ) | NEG |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | SM CHG |
DEANs LIST | POS |
THE TIDE | POS |
SUM IND | POS |
VTI | POS |
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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.
Category: Professor's Comments, Weekend Strategy Review