Professor’s Comments December 21, 2018
Posted by OMS at December 21st, 2018
The markets continued their plunge yesterday, as traders continued to worry that the Fed is driving the country into recession. The Dow fell 464 points to close at 22,860. It reached a low of 22,644 before bouncing into the close. I had been using a target of 22,800 for Wave 3 down on the Dow, so yesterday’s decline was well within that range. The NASDAQ and SPX were down 108 and 40 points, respectively. Volume on the NYSE was heavy, coming in at 129 percent of its 10-day moving average. There were 4 new highs and a massive 1,270 new lows.
So now that my downside target for Wave 3 down has been reached, what should we expect now? Hmmm?
Well, for starters, the markets are EXTREMELY oversold. The A-D oscillator closed with a reading of -267.8. Readings below -250 usually result in a short term bounce. That bounce could be the start of some type of corrective wave up. In this case, it could be a sub-wave within Wave 3 down or Wave 4 up. Given the unrelenting selling we’ve seen for the past few days, it appears that we’re right in the heart of wave 3 of Wave 3 down, so as a minimum, the Dow should re-test yesterday’s lows before it begins to develop some type of short-term bottom. What I need to see now is smaller candlesticks, together with a Bullish candle pattern that will mark the bottom. I’m not seeing this yet.
A few weeks ago, when the Dow was flirting with its moving average, near 24,700, I talked about the risk-reward in establishing short or inverse positions for the ride down below 23,000. I mentioned that I liked the trade because the reward-risk ratio was better than 6:1. But now that the Dow has traded slightly below my short-term target level, the reward-risk ratio for the short side is no longer favorable. Now, it’s basically an even money bet, and I don’t like to bet when the odds are even.
So, I’m moving to the sidelines. If the Dow starts to show signs of a short-term bottom, I’ll think about scalp trades to the long side in one or two index ETFs. But I’m not there yet. The market is still dangerously negative, and Wave 3 down could continue to the 21,300 level (the level of the 200-day moving average on the Weekly charts) before it completes. I don’t think this will happen on this leg down, but you never know. All I know at this point is that the markets are EXTREMELY oversold and when this happens…even in a crash, they usually bounce.
Students should understand that all my Lists, cockpit indicators and patterns remain EXTREMELY negative. So, this is NOT the time to be brave and try to catch that falling knife. IF I’m going to trade a few shares to the upside, I MUST see some type of bottoming action before I put my money at risk. And even though the Dow has reached my downside target, that doesn’t mean it can’t continue to fall.
One of the stocks I was watching during yesterday’s decline was Valero (VLO). The refiner was down modestly dropping 0.37 cents to 70.61. Valero is just the type of stock the I like to trade in this market. The company trades at a P/E or 6.7 and pays a 4.72 percent dividend. Back in early October, the stock was trading at 120. Now it’s at 70.61. IF you look at some of the stocks that have held up in this market, they have one thing in common. They pay high dividends. For example, just look at my favorite utility, Con Edison (ED). Back in early November, when I’m always liking to buy ED to help pay for Christmas, the stock was selling in the low 70s. But once the overall market started to dive, money came out of the FANG stocks and a lot of found its way into the utilities. So, instead of falling, ED rose from the low 70s to 84.33. Now, even after the ‘crash’ its still trading at 80.73. ED currently pays a dividend of 3.41 percent, so the dividend on Valero is over a full point higher. And while I believe the upside on ED is limited, I think VLO could easily attract the attention of ‘Bargain Hunters’ to push it into the low 80s on a short-term bounce. Truth be told, I love the refiners. Unlike the techs, I understand the refiners. And now that they are ‘On-Sale’ with the favorable February-March time period coming up, I love them even more. I bought a few shares as a short-term trade yesterday.
Students should be aware that my major market timing signal for Crude Oil is still on a Sell Signal, so I’m only looking at VLO as a counter trend trade. On the other hand, IF my timing signal for crude turns positive, VLO is one of the stocks I will be holding for the energy trade.
The Sector Ratio stayed at 0-24 negative. There were NO sectors on the Strong List. I keep checking to see if the algorithm that generates the Strong List is broken. It’s not. All 24 Sectors are on the Weak List.
Gold and most mining stocks rose yesterday. One day after the Fed raised rates, the Bank of England decided to keep rated unchanged. They were worried that a rate increase on top of Brexit would cause further damage to their economy and markets. The news caused a rise in the Euro and a decline in the Dollar, which pushed gold prices up. I’m still on a Buy Signal for gold (the metal) and a Sell on the miners.
Bonds were strong again yesterday but pulled back late in the day. TMF has been moving higher since my market timing signal for Bonds generated a Buy Signal on 19 November. But after yesterday’s trading, the Money Flow indicator on TMF turned negative, so money is now coming out of the ETF after a nice run. I’m still on a positive signal for Bonds, but we need to watch them closely now that the MF indicator has turned negative. The institutions could be starting to move out of Bonds and into a few selective equities. BTW, this is another reason why we could be approaching a short-term bottom. We’ll see.
I won’t be doing much today. But IF we get a successful re-test of yesterday’s lows, I will likely do some selective buying.
That’s what I’m doing,
h
Market Signals for
12-21-2018
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 06 Dec 2018 |
NASDAQ | NEG | 07 Dec 2018 |
GOLD | POS | 03 Dec 2018 |
U.S. DOLLAR | NEU | 28 Nov 2018 |
BONDS | POS | 19 Nov 2018 |
CRUDE OIL | NEG | 23 Oct 2018 |
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