Professor’s Comments May 16, 2018

Posted by OMS  at May 16th, 2018

The markets pulled back as expected yesterday.  The Dow finished down 193 points at 24,629.  The NASDAQ and SPX finished the day down 60 and 19 points, respectively.  Volume on the NYSE was low, coming in at 89 percent of its 10-day moving average.  There were 69 new highs and 100 new lows.

There were no changes to the cockpit indicators after yesterday’s decline.  My combination VTI-volume indicator remains on a Buy Signal, with the VTI portion of the signal now at 65.72 and rising.  If it moves above 70, the Dow will enter the Trend Mode.  The 2-period RSI fell to 33.5 after yesterday’s pullback, so the market is still not EXTREMMELY oversold.  In other words, any early rally today will likely be followed by further weakness.  I would view the pullback as a buying opportunity, but again, I’m not in any rush to buy stocks.

As I mentioned yesterday, I really want to see two lows form during this pullback.  The next low should be lower than yesterday’s low of 24,629.  If this happens, the pattern will form a nice ‘Blade’ for our Hockey Stick which should provide the energy for the next move higher (Wave 3 up). BTW, the 50-day moving average on the Dow is currently at the 24,485 level, so it provides an obvious target for the next low of Wave 2 down.  If this low is exceeded, the Dow will likely test the Upper Trend Line of the triangle which is currently located at the 24,240 level.  So ideally, the range between 24,240 and 24,485 is where I’ll be looking to buy stocks.  I say ‘ideally’ because Wave 2s are never ‘ideal’.  They seem to have a mind of their own.

As for me, I’ll be looking to buy stocks on any pullback below 24,629.  Any move below 24,629 will satisfy my requirement for two lows.  Also, students should understand that not all stocks will be pulling back to form two lower lows.  That’s because not all stocks are in the same pattern as the Dow.  Most of these stronger stocks have already begun their Wave 3 rallies, so any pullback for them will likely only be a minor correction.  On these stocks, buying opportunities will come when the 2-period RSI becomes oversold.

Yesterday’s Sector Ratio reflected the weakness in the sectors by falling to 19-5 negative.  This is perfectly normal for a Wave 2 correction.  I would expect that once Wave 2 completes, the Sector Ratio turn positive again signaling that Wave 3 up has begun.  Conservative investors might want to wait for the Sector Ratio to turn positive again before becoming aggressive with their stock purchases.  If I’m right about the current pullback being a Wave 2, we shouldn’t have to wait long before the Ratio starts to improve.  Maybe a few more days.  Be patient.

Energy, Healthcare, Utilities, Computers and Leisure were the strongest sectors.  These are the sectors where I will be looking to buy stocks.  I will also be looking to buy the Semiconductors, Banks, and Financials.  I simply can’t imagine a Wave 3 of 5 rally starting without their participation.  If they don’t appear on the Strong List, I would not commit my money to the rally.  Not seeing them on the List would be a strong sign that something else is likely be going on.

The weakest sectors were Household Products, Food, Service, Real Estate and Telecoms.  They all got clobbered yesterday.  BTW, the Real Estate Sector (which is mostly REITS), has formed an inverse Hockey Stick Pattern that suggests lower prices.  Be EXTREMELY careful if you own REITS.

Watching to see how the pullback develops.  If we get an early rally today, it could be the ‘B’ wave of Wave 2 with wave ‘C’ down to follow.

That’s what I’m doing,

h

Market Signals for

05-16-2018

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