Professor’s Comments January 30, 2018

Posted by OMS  at January 30th, 2018

The markets fell hard yesterday.  The Dow lost 177 points, closing at 26,439.  The NASDAQ and SPX fell 39 and 19 points, respectively.  Volume on the NYSE was moderate, coming in at 95 percent of its 10-day average.  There were 226 new highs and a whopping 204 new lows.  BTW, after last Thursday’s rally, I mentioned that it was strange to see the number of new highs decrease by almost 100, while the new lows almost doubled from the previous day.  This decrease in breadth carried through the weekend, and impacted yesterday’s session, as the number of new lows increased to the largest number we’ve seen in months.

It was enough to turn The Tide negative.

So, with a negative Tide, we need to start paying attention to The Dean’s List.  If the inverse index ETFs start to appear on the List, and the other cockpit indicators start to turn negative, the market could be setting up for a major decline.  If they don’t, and most of the indicators remain positive, the Dow will likely pullback to the 25,700 or so to complete wave 4 down, before rising to new highs several months from now.

In other words, the market has arrived at a cross roads.  That’s what the negative Tide is telling us.  It means that there is not enough positive breadth to move the market higher now, so it needs to rest.  Rest periods are usually wave 4s.

This would not be unusual after the impulse rally we’ve seen for the fast few months.  The market needs a rest.  It’s normal.

The only fly in the ointment is the fact that the market has just finished a parabolic rally for what appears to be Wave 3.  And parabolic rallies don’t usually end well.  So, we need to pay attention to the indicators.

Again, if most of the indicators remain positive, the pullback should be relatively mild, maybe 400-500 Dow points.  That’s not much considering the Dow is up almost 1,800 points since the beginning of the year.  But any break below 25,700 could spell trouble, mostly because of the Ending Diagonal Pattern I talked about last week.  Ending Diagonals have a target where they began, or in this case near the 24,800 level.  A decline to this level would set up a more serious pattern. 

Bottom Line: Watch the indicators.  Right now, the negative Tide is telling me to be cautious.  Remember, I NEVER like to trade the long side with a negative Tide.  You never know IF a negative Tide will turn into a Tsunami!  On the other hand, my combination VTI-volume indicator remains positive.  If this indicator stays positive, I expect the pullback to be relatively small.

Yesterday’s action did not change the Sector Ratio.  It’s still strong at 22-2 positive.  The only weak sectors are the Utilities and Real Estate.  Both sectors got hammered yesterday.  In contrast, the two sectors that were leading the Strong Sector List, Healthcare and FoodDrugs, both rose during yesterdays decline.  Amazing!  The Dow drops 177 points and the two strongest Sectors both rise!  How good is that?  The other strong sectors, Retail, Cap Equipment, and Specialty Banks had relatively small pullbacks.

Students should note how the top sectors perform in the weeks ahead, as once the pullback completes, I believe it will be the stocks and ETFs in these strong sectors that will lead the market higher as wave 5 up unfolds.

Like I continue to say, stay in stocks and ETFs in the strong sectors and avoid the weak sectors like the plaque.  It pay$.

Gold and moist mining stocks declined yesterday.  GLD dropped 0.72 cents to 127.35.  GDX fell 0.67 cents to 23.68.  Both ETFs remain in Up Trends with positive VTI-volume indicators, but after yesterday’s decline, their 2-period RSI is now oversold.  In other words, both ETFs are now back in Rifle Trading territory.  So today, I will be watching the short-term bars looking for opportunities to re-purchase the shares I sold last week when the 2-period RSI was overbought.

I won’t be doing much with the equity markets, as I really don’t like to trade wave 4s, especially those that follow parabolic rallies.  Wave 4s after a parabolic rally can turn nasty, (drop lower than expected) so I want to see how it develops before I start looking for buying opportunities.

That’s what I’m doing,

h

Market Signals for

01-30-2018

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