Weekend Strategy Review October 14, 2018
Posted by OMS at October 14th, 2018
The markets bounced from EXTREME oversold conditions on Friday. The bounce was expected as the A-D oscillator went into the day with a reading of 294.2. If the markets didn’t bounce, they would have entered the free fall mode, something that rarely happens, but can with EXTREME A-D oscillator readings. By bouncing on Friday, it tells me that the markets are following a ‘normal’ five-wave down sequence with Friday’s bounce being part of a normal wave 4 retracement before the market re-tests its lows.
One of the reasons I believe the decline is not done yet is because the recent decline on the Dow and NASDAQ caused them to generate Weekly Sell Signals on my VTI-volume indicator. Weekly VTI-volume Sell Signals are usually reliable signals, so students should not take them lightly. We saw what happened after several of the European country ETFs generated Weekly Sell Signals. Germany’s ETF (EWG) fell from 33.3 to 27.5. Italy’s ETF, EWI, fell from 34.15 to 25.53. Most of the other European country ETFs had similar results. A Weekly Sell signal is not something to ignore.
It’s also never a good thing to see a Weekly Sell Signal develop when the markets are breaking out of reliable patterns. Especially when these patterns that have significantly lower downside targets of 24,000 on the Dow and 6,400 on the NASDAQ. Be careful.
Students should understand that these Sell Signals are occurring because the Fed, which was a friend to the market since 2009 with its ‘QE’ Stimulus Program, is now an enemy because of its ‘Unwinding’ program. The Fed is now selling the assets it accumulated since 2009 at the rate of $50 Billion per month. This selling together with its raising of short-term interest rates is tightening the money supply, which makes less money available to buy equities. Simply put, the Fed is no longer your friend. Their actions will likely have a negative impact on the markets until the selling stops. But it’s not that simple. If the Fed selling triggers a recession, or worse…a depression, then even if the Fed stops selling, it will be hard to check the decline in equities as company earnings will start to decline as the economy slows.
Speaking of earnings, J.P Morgan Chase (JPN) reported earnings of $2.34 per share on Friday, which beat expectations. Yet the stock dropped $1.18 on Friday. Hmmm? Remember what I said in Class about stocks that report great earnings but see the stock price drop after the announcement. It usually a sign of lower prices going forward.
Alcoa Corporation, one of the companies I watch for clues to the earnings season, will report earnings on Wednesday after market close. Most analysts expect about 0.42 cents per share. Don’t pay attention to the announced earnings, pay attention to what the stock price does AFTER the announcement. That should give you a good idea about what to expect from most companies during this earnings season.
If the price of Alcoa bounces after the announcement, its likely that wave 3 of the current down draft is complete and we’ll have 2+ weeks of volatile trading as a triangle develops for wave 4 of Wave 1 down. After wave 4 complete, the markets should resume their downward course. On the other hand, IF the markets don’t bounce after AA’s earnings, it’s likely that wave 3 down is NOT complete and Thursday’s low of 24,900 will be retested.
The Sector Ratio improved to 2-22 negative after Friday’s session. The Telecom Sector joined the Utilities on the Strong List. I can’t get excited about the change. The Strong List is still way too weak for me to even think about doing anything to the upside.
Except for gold.
BTW, I must tell you what I did with my granddaughter, London, on Friday. Marcia and I took her to Summer Bay Resort in Orlando for two nights. Summer Bay has a small waterpark as part of the resort that has zip lines, water features, inflatable machines with harnesses for bouncing and aerobatics, and pillars for rock climbing. In other words, everything an active 7 year old would love.
Anyhow, you might wonder why I am so anxious to relay this story? Well, as it turns out, while London was on the zip-line, Grandpa was trading NUGT. Remember, my VTI-volume indicator was on a recent Buy Signal for gold, so I was anxious to trade NUGT.
I pulled up the ThinkorSwim app on my iPhone and set the screen for a 2-period RSI and a 35-period CCI. It was everything I needed to trade NUGT, given that I already knew that gold was on a Buy Signal. So, at 11:05, when London hit the zip-line, Grandpa bought a few shares on NUGT at 14.50 when the CCI on the 5 min chart told him the down trend was over. By 12:55, London had made 5 trips down the zip-line and grandpa was up 0.80 cents on his shares. We then moved to the machine where London could practice her aerobatics. At 14:00, with London high in the air, swinging like a circus performer, Grandpa bought a few more shares of NUGT seeing a Hockey Stick Pattern, an oversold RSI and No Trend from the CCI. When London got off the ride, Grandpa closed the position for another 0.40 cent gain. It was time for pizza and a London-Grandpa shopping experience. Don’t ask me why, but London picked out a pair of combat boots. Go figure?
I wanted to relate this story to you because the new ThinkorSwim app is simply amazing. It allows you to trade with technical indicators from anywhere you can get a signal on your phone. I normally don’t recommend anything on these pages, but I really believe you should try the new app. I can’t tell you how much fun I had at the waterpark, watching London and trading NUGT. We both had a blast!!!
Have a great weekend.
That’s what I’m doing,
Market Signals for
|DOW||NEG-T||10 Oct 2018|
|NASDAQ||NEG-T||05 Oct 2018|
|GOLD||POS||11 Oct 2018|
|U.S. DOLLAR||POS||03 Oct 2018|
|BONDS||NEG||05 Sep 2018|
|CRUDE OIL||NEU||10 Oct 2018|
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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.