Weekend Strategy Review October 28, 2018

Posted by OMS  at October 28th, 2018

The markets were down hard again on Friday.  The Dow closed 296 points lower at 26,688. It was down 756 points for the week.  The NADASQ was down 151 points on Friday and down 282 points for the week.  Both indexes generated weekly VTI-volume Sell Signals joining the weekly Sell Signals on Europe, Australia, Asia, and Canada.  Weekly VTI-volume Sell Signals are longer term signals, so until these signals turn positive, it’s likely global decline in equities will continue.

Several weeks ago, when the Dow was trading above 26,500, I said that the large cap index would likely drop to the 24,000 level once the Ending Diagonal Pattern was complete.  Several students wrote me about this comment and said it could not happen, that their business was booming, sales and earnings were good.  The American economy was growing.  How could the stock market decline in this environment?    Hmmm?  Well this past week we saw once again how the equity markets do not reflect the current state of the economy.  Even though most companies that reported earnings this past week were positive, the market fell.  It’s just another reason why I don’t pay any attention to earnings.  Earnings are what happened in the past quarter.  They’re history. They’re practically useless in predicting what’s going to happen in the future. Watching earnings is like driving a car from the back seat, looking backwards. Yet all Fox New and CNBC do all day long is talk about earnings.  It’s nonsense!

This is why we use patterns, indicators, and Lists to predict where the market will go.  Patterns don’t lie. They’re formed by the daily up-down-up trading action of the market.  There’s no opinion in a pattern.  It’s simply there, waiting to unfold.   

For the past few weeks, as the Dow was rising in the 5^th wave of a Major Wave 5, we saw it develop an Ending Diagonal, also known as a Bearish Rising Wedge Pattern.  The pattern is a termination pattern.  It occurs at the end of a major move.  The entire time the pattern was developing, I never once heard anyone on Fox or CNBC talk about the Ending Diagonal.  All they wanted to do was talk about the FANG stocks and how they were going to the moon.  Ending Diagonals?  Are you nuts?  People don’t watch Fox or CNBC to be told about Ending Diagonals or Bear markets. They want to hear how the Amazon they’re holding is going to 3,000.  For these people, patterns and indicators don’t matter.  They like to hear the cheerleaders, not the boring stuff of technical analysis.   And because of this, they didn’t know that AMZN had formed a Three Highs to a Top Pattern and the DMI turned negative on 2 October.  They didn’t know that the VTI-volume indicator on AMZN has been on a Sell Signal since 3 October (when the stock was at 1,953.)  They don’t know that the 35-period CCI has been in the down Trend Mode since 5 October when the stock was at 1,953.  So yesterday, with their stock closed at 1,643, they wondered what happened.  Hmmm?

This weekend, all those people will still be wondering. They’ll spend a lot of time listening to the TV commentators for answers.  They’ll buy and read the Wall Street Journal or a copy of the latest Forbes.  Not one of them will look at the DMI.  Not one of them will recognize the Ending Diagonal or the recent Head & Shoulders Pattern that kicked off the current decline.  But you will.  You took the Class.  Congratulations!!!  

Anyhow, looking at the pattern, even though the Dow closed at 24,688 on Friday, the pattern suggests we still have more downside to go.  Like I said on Friday, once the Dow broke below the 15 August low of 24,965, there’s not a lot of support until it approaches the 24,000 level.  Remember, we’re in an impulsive Wave 3 down now, so I wouldn’t look for a bottom until the Dow gets closer to that level.  Also, I’m still not seeing any signs of major institutional buying and until the Big Boys step up to the plate, it’s going to be tough to check the down draft.

However, once the Dow nears 24,000, which is where the Ending Diagonal started, we need to watch for a bottom.  It likely won’t be the real bottom, just the bottom of Wave 3 down.  We’ll still need to develop Wave 4 up and Wave 5 down before Major Wave 1 of the new Bear Market is complete.  The Dow will likely be trading well below 24,000 by then, probably closer to 23,500+/-.  Again, this level was obtained from the H&S Pattern.  When the Dow starts dropping again, you’ll understand why this is happening because you took the Class.  You understand patterns and wave counts.  The folks on Fox Business News and most of your friends will be still be wondering what happened. 

The Sector Ratio remained at 0-24 negative after Friday’s session.  No algorithm that drives the Ratio is NOT broken.  It’s just confirming the fact that there are NO strong sectors in this market.  Think back to 3 October, when the Sector Ratio gave its first neutral reading of 12-12 after being positive for months.  MONTHS!  Then on 4 October, the Ratio showed its first negative reading at 10-14 negative. It’s been negative ever since.  Hmmm?  Did any of the market commentators say anything about this?  No.  They didn’t have the Sector Ratio.  You did.

So, this weekend, I’m going to ask you to do me a favor.  Please tell your friends and family members about my Classes at UNF.  Give them your copy of my book.  Spread the word.  Tell them about the importance of technical analysis and how it can be used to protect their investments.  Discuss the value of patterns, indicators, and Lists vs. having to rely on the opinions of commentators.  Make them understand that with these tools, they can manage their money better than any commentator or most financial advisors.  I hate to think about all the money that evaporated from portfolios this week.  Money that could be used for a child’s education, a new home or a retirement.  It’s important that we take the time to help others learn.  So, please do this for me.  Thank you.

After posting my WSR, I received a question from Gayle M. asking about Institutional Investors, and how I know where they’re putting their money. Gayle’s question was the second one I received about the institutions, so I thought I would share my what I said to her in my email reply.  I hope the answer provides further insight into why I developed the Sector Lists and the Sector Ratio, and why I use them to increase my success in trading.

Here’s what I said to Gayle:

“The answer to your question is complicated because it’s really a two part answer.  The first part has to do with where are the institutions putting their money.  First, there are many types of institutional investors, but pension funds and mutual funds are the largest.  It’s tough to find out what pension funds are doing, but relatively easy to track mutual funds.  However, because most mutual funds are only required to report holdings quarterly, you get the data late.  That really doesn’t bother me anymore because I did a lot of research on what the mutual funds were holding and as it turns out, most of the stocks were in the top sectors of my Strong Sector List.  This was not a surprise, because it was their large purchases that was pushing the prices up. Makes total sense!

So just by looking at the Strong Sector List, I knew where the money was going.

OK, now for the second part of your question which is the ‘when’ part, or when are the institutions are buying.  I get this by looking at the large block trades that come in.  There are many ways to do this.  There are professional services that offer institutional volume data for a fee….a large fee. It’s extremely pricey.  But I stopped doing this after seeing that I can monitor institutional buying just by looking at a few of the institutional favorites.  I just look for large spikes in my short term volume data for stocks like Amazon, Facebook, and Google, especially when a pattern shows a major top or bottom is approaching.  So, when I recently saw large data spikes in several FANG stocks, it was telling me that the institutions were selling technology.  Then when I saw large spikes in the strong sectors, like Utilities, Household Products, and the Telecoms, I knew where the money was going.  This is what makes the Sector Lists and Sector Ratio so great.

Also knowing that almost all mutual funds are required to keep between 94 to 98 percent of their funds fully invested, we know they can’t be in cash. So, all they can do is stay in the market, whether it goes up or down. This Sector Rotation makes the Sector Lists even more important. 

This is the reason why I revised my overall strategy recently to highlight the key Market Timing indicators.  So now I start my stock or ETF selection process by looking at the Timing Indicators.  For example, if the timing indicator for the Dow turns positive, I would look at the Strong Sector List to determine which Sectors are the strongest.  Once I knew this, I would then select ETF and stocks from the Dean’s List or Members Watch List.

Right now, because gold is one of the Market Timing indicators, besides the Dollar, with a Green Signal, I’m mostly trading gold and gold stocks from the DL and MWL.”

Also, something I did not mention in my email to Gayle, is what the Sector Ratio likely means when it starts showing a reading of 0-24 negative.  I say ‘likely’ because I have NOT had an opportunity to research this rare reading, mostly because it has not happened since I developed the Sector Ratio.  But here’s what I think it means.

OK, given that the Mutual Funds MUST remain between 94-98 percent invested, with only about 2-6 percent in available cash, when a down turn occurs in the market, a lot of their investors start selling.  And when this happens, the Funds quickly run out of cash to pay off these investors.  So, they MUST start selling stocks to raise even more cash to maintain the cash ratios mandated in their prospectus.  This is when things start to get dicey for them.  A Sector Ratio of 0-24 negative means there are NO Strong Sectors.  It’s a time when the baby gets thrown out with the bath water.

I believe this is what happened last week, when the institutions were selling gold stocks. Most Mutual Funds don’t hold commodities, but they do buy and hold mining stocks.  And because most funds have only recently been buying mining stocks, they don’t have a lot of gains in them.  So, for tax purposes, gold stocks were likely among the first to go.  Remember, IF a Fund sells some Amazon that it bought three years ago, they’ll probably have to pay a larger tax (despite the advantages of a reduced tax rate for holding over one year) than a gold stock they acquired two weeks ago.  So, any recent purchases will get dumped first.  Like I said, I believe this is the reason why mining stocks got hit.  I believe this selling of mining stocks is only temporary.

Once Wave 3 bottoms, and the 4 buying resumes in Wave 4 up, I believe mining stocks will be among the first to be re-bought by the institutions.  If you noticed, gold (the metal) did not fall along with the market.  GLD has been holding its own and made a new rally high of 117.65 on Friday, up 0.37 cents on a day when the Dow dropped 296 points. Gold remains on a VTI-volume Buy Signal with a pattern that suggests a ‘Rope Jump’ is in the cards.  The 200-day moving average is now located at 118.30.  If GLD can move above 118.30, you’re gonna see a lot of institutional interest in gold….and mining stocks.

Continue to have a great weekend.

That’s what I’m doing,

h

Market Signals for

10-29-2018

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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.