Weekend Strategy Review October 7, 2018
Posted by OMS at October 7th, 2018
The markets got hit hard again on Friday with the Dow dropping another 180 points to close at 26,447. At one point during the day the Dow was down over 326 points. But even with the big losses on Thursday and Friday, the Dow was only down 11 points for the week.
The NASDAQ was hit the hardest as technology, especially the ‘FANG’ stocks, got hammered. BTW, most of these ’FANG’ stocks are now on VTI-volume indicator Sell Signals. Some, like FB and GOOG, are on Weekly Sell Signals. The NASDAQ dropped 91 points on Friday and down a whopping 258 points for the week.
For the past few weeks, I’ve been talking about how equity prices were pushing higher without a corresponding increase in breadth. The negative divergence was a warning that a top of major significance was approaching. During the week, we saw the Dow push to a new record high of 26,952, before pulling back and forming an ‘Evening Star’ candlestick pattern. That negative candle, together with several other negative candles, like the Hammer, Gravestone Doji, and others were also warning that a top was near.
We also saw the VTI-volume indicator on the NASDAQ turn negative at the same time The Tide, our primary breadth indicator, turned negative. These too were warnings.
One of the reasons we were concerned about these warnings was because there was a negative Head & Shoulders Pattern on the NASDAQ-100 or QQQ. The pattern suggested that a break of the neckline at 185.30 would likely send prices down to support at the 182 level. This level was not only important Trend Line Support, but it was also where the 50-day moving average was located. So, a break of 182 was also a ‘Rope Jump’ of the 50. The Q’s traded down to 178.43 on Friday, and more importantly, closed at 180.15, which is below the 50-day moving average. So now, if the Q’s continue to trade below the 50, they will start to pull the 50 down towards the 200 which is currently located near the 171 level. This will likely take some time, probably several weeks, but the fact that the most popular stocks being traded in America today are no longer above their 50 should be a major concern. In my Position Trading Class at UNF, I describe how a stock, or a market starts to turn, from an uptrend to a down trend. The first step in the process is always a drop below the 50-day moving average.
Several weeks ago, we saw RWM and TWM, the two inverse ETFs for the Russell 2K appear on the Dean’s List. This told us that small cap stocks were NOT following the lead of the Dow generals. BTW, this is something that happens not only in stocks, it happens in real life too. The guys that do the fighting usually know when it’s time to quit the fight, long before the politicians in Washington. It’s the small caps that lead, not the other way around. The Russell 2K has been on a VTI-volume Sell Signal since 5 September!!!!
And finally, we saw the Sector Ratio start to decrease, from values near 20-4 positive when the Dow’s rally started in late July, to a neutral 12-12 earlier this week. Then, on Thursday, the Sector Ratio turned negative. The Ratio finished with a 10-14 negative reading on Friday, so now there are more sectors in the S&P 500 falling than rising. BTW, let’s talk about the Strong Sector List for a minute…..
For the past several weeks I have been telling students to stay in the strong sectors and avoiding the weak sectors. We saw how important this was on Friday as technology got hammered. I have to ask you …was technology on the Strong List? No. Has it been on the Strong List anytime in the past few weeks? No. How ‘bout in the past few months? NO! The aggressive sectors like technology and semiconductors have been noticeably absent. So, what has been on the Strong Sector List recently? How ‘bout Household Products? Kimberly (KMB) was up 1.06 on Friday. Clorox (CLX) was up a whopping 3 points!!! What about the Telecoms? They’ve been on the Strong List too. They did fine on Friday. Verizon and AT&T were only down a few pennies. Again, it Pay$ to be in the Strongest Sectors.
So where are we this weekend? And what’s my strategy for the next week or so?
Well, with the markets looking like they’re starting to roll over, this not the time I want to be trading or holding any equities on the long side. Also, the markets are no longer in the Trend Mode, so buying and holding stocks, except for gold and mining stocks, is not something I want to do. Also, if you look at the Dean’s List, you’ll notice that all the European country ETF have dropped off the List and have been replaced by EPV, the inverse ETF for Europe. So, the decline in Europe is underway. Most of the European country ETFs are now on Weekly (long-term) down signals. So are Canada, Australia and many other countries. But I want to focus on Europe because I believe their markets are the weakest and have the most potential for a large decline. EPV is currently trading near 33. Its long term high, established in February 2016 is 75. The 200-day moving average for EPV is near the 51 level. If I’m right about Europe collapsing during the next 1-2 years, EPV could be a nice place to be. Also, with all the European country ETFs on Sell Signals, you need to be careful about holding any European stocks. The debt and currency problems that currently exist in Europe are far greater than they are here in the U.S., and once things start rolling south, European stocks will likely get hit hard.
One of the reasons I say this is because Vanguard’s European ETF, VGK, is currently forming a Head & Shoulders pattern with a neckline near the 54 level. If VGK breaks 54, it will likely drop to the 44-45 level in a few months, then continue dropping to below 40, probably ending up in the mid-30’s in the next 2-3 years. I know that a lot of students like to short stocks or ETFs, and that’s why I’m writing about EPV, an inverse ETF that you can buy and hold long. So, here’s what I’m gonna do. On Monday, I plan to buy a few ‘trial’ shares of EPV. Then IF VGK breaks below 54, I’ll add to my ‘trial’ shares of EPV. I’ll be doing this in my regular trading account and my IRA. At this point, with the U.S. markets still on mixed signals, I want to have something on to the short side. And right now, it appears that European markets will be the ones leading the American markets down.
I also want to have a position in gold. If you look at the cockpit, one of the things you’ll notice is that gold has moved to a Buy Signal. On Friday, I bought more gold, adding to my existing ‘trial’ positions in GDX and NUGT, a highly leveraged gold ETF. Why? Pull up a chart of GDX and NUGT. Can you see the inverse H&S pattern that has been forming? If NUGT can break above the neckline at the 14.41 level next week, it could be a very nice place to be.
As I always say, nothing is guaranteed in trading. All you can try to do is put the odds on your side. And a Buy Signal on gold plus an inverse Head& Shoulders pattern certainly increases the odds.
Have a great weekend,
That’s what I’m doing,
Oh, I forget…the Strong Sector List was led by Utilities, PharmaBio, Household Products, Telecoms, and Food Drugs. The Weak List was led by Service, Consumer Products, Semiconductors, Retail, and Leisure. Technology, Computers, Banks, and Healthcare are all on the Weak List near the middle. Avoid them! With the market looking like it’s starting to roll over, it’s like stocks in these sectors will lead the market lower.
Market Signals for
|DOW||NEU||04 Oct 2018|
|NASDAQ||NEG||05 Oct 2018|
|GOLD||POS||05 Oct 2018|
|U.S. DOLLAR||POS||03 Oct 2018|
|BONDS||NEG||05 Sep 2018|
|CRUDE OIL||POS-T||19 Sep 2018|
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