Professor’s Comments March 8, 2019

Posted by OMS  at March 8th, 2019

The markets continued to decline yesterday.  The Dow dropped 200 points, closing at 25,473. The NASDAQ and SPX were down 84 and 23 points, respectively.  Volume on the NYSE was moderate, coming in at 102 percent of its 10-day moving average. There were 71 new highs and 52 new lows.  The increase in new lows finally turned The Tide negative.

It appears the Wave 2 decline is starting.  So far, my custom VTI-volume indicator is on Sell Signals for the Dow and Russell 2K.  The Same indicator is showing a Neutral Signal for the NASDAQ-100 (QQQ) and S&P500 (SPY).

With the Dow and RUT in decline, it might be a good time to make a few projections for what the decline might look like.  Obviously, IF the decline is a corrective Wave 2, it should retrace a good part of Wave 1 up in an a-b-c- move.  So right away, we know that we’ll have to be on our toes as traders because the decline won’t be straight down.

IF corrective Wave 2 down is starting, the most likely scenario would be for the Dow to decline to about the 25,000 level for Wave ‘a’ down. After that, the large cap index should rally back to the 26,000 level for the Wave ‘b’ up.  Then once this rally completes, Wave ‘c’ down should drop the Dow to somewhere near the 24,500 level.  The whole process should take about 6 weeks, give or take.  Again, this assumes that the decline is a correction within a Bull Market.  IF this assumption is correct, once Wave 2 down completes, Wave 3 up should take the Dow to new highs later this year.

On the other hand, IF the current decline is NOT a Wave 2, and is part of a much larger Bearish Scenario, the 24,500 level should not hold, and the Dow should continue falling to about the 23,000 level.  After that there would be a series of retracement moves that once complete, would see the Dow falling to about 21,000, with 20,000 possible.  So, as I’ve been saying, seeing how the current decline unfolds will be critical for determining the future direction of the market.  But let’s not get ahead of ourselves.  Right now, my only concern is what’s happening with the current indicators.  And for now, they’re still mixed.

I’m also still seeing a very strong Sector Ratio.  Last night, even with a 200 point decline in the Dow, the Sector Ratio stayed at 23-1 positive.  This troubles me.  Remember, what happened last October … the Sector Ratio went from being very strong-to neutral- to very weak over the course of a week. This change hasn’t started to happen, so I’m still cautious.  This is one of the reasons I have only committed a portion of the funds in the Model Portfolio to ETFs with negative signals.  The Strong Sector List continues to be led by Household Products, Semiconductors, Technology, Retail and Cap Goods. The only Weak Sector is FoodDrugs.

Gold and mining stocks continued to pull back yesterday. GLD fell 0.10 cents to 121.51.  GLD still appears to be working its way through a Wave 2 pullback.  The past four days of trading have formed a small ‘Blade’ on the Daily Chart of GLD.  If this ‘Blade’ is broken, GLD will likely fall to its 200-day moving average currently at 119.84. Once the timing indicator for GLD turns positive, I’ll be adding a gold position to the Model Portfolio. Be patient and watch for a signal change.

Crude Oil (UCO) still appears to be working its way through a small triangle along its 50-day moving average.  The highs and lows of the triangle are 20.24 and 18.43.  As long as the price of UCO stays above the 18.35 level, and the indicators remain positive, I’m not too concerned. Triangles need to play out.  A break above 20.24 would project a move to the 23+ level.

Model Portfolio:  The Model made a few changes yesterday adding shares of DXD and TZA. So now the Model is 25 percent invested in Crude Oil (UCO), 25 percent invested in DXD, the inverse ETF for the Dow, and owns 1,000 shares of TZA, a 3X leveraged ETF for the Russell 2K.  A portion of the funds I planned to use to buy inverse ETFs on the NASDAQ were used to buy shares of TZA, mostly because the Russell was on a Sell Signal while the NASDAQ was not.  I wanted to follow the signals.

I’m still waiting for gold to complete its Wave 2 pullback before adding gold shares to the Model.  BTW, students should take a quick look at GLD on a Weekly Chart to see what I believe is the bigger picture for GLD.  Students should note how a LARGE cup has formed since last April with the beginnings of a ‘Handle’ now underway.  The initial moves of the ‘Handle’ have developed between 120 and 127.  So, it’s likely that we’ll see GLD continue to trade between 120 and 127 for the next few months to complete the ‘Handle’.  With 200-week moving average support on GLD at the 120.50 level, I find GLD at current levels or slightly lower to be EXTREMELY attractive.  But I won’t be adding gold to the Model Portfolio until my timing signals give say so.

That’s what I’m doing,

h

Market Signals for

03-08-2019

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