Professor’s Comments May 17, 2018

Posted by OMS  at May 17th, 2018

The markets rallied mildly yesterday.  The Dow finished up 63 points at 24,769.  The NASDAQ and SPX finished the day up 47 and 11 points, respectively.  Volume on the NYSE was moderate, coming in at 95 percent of its 10-day moving average.  There were 125 new highs and 54 new lows.

Yesterday’s rally appeared to be the ‘B’ wave of corrective Wave 2 down.  If this is the case, wave ‘C’ of Wave 2 down could begin today.  I would expect it to produce the second low of the ‘Blade’, probably taking the Dow below the 24,629 level.

The most likely targets for Wave ‘C’ down are the 24,240 – 24,495 levels. The 24,495 level is where the 50-day moving average is currently located.  It should provide strong support for any decline.  If this level does not hold, the Dow could decline to support provided by the Upper Trend Line of the triangle near 24,240.  At this point, I believe a decline to this level has a low probability of occurring.

There were no changes to the cockpit indicators after yesterday’s rally.  My combination VTI-volume indicator remains on a Buy Signal, with the VTI portion of the signal now at 66.8 and rising.  If it moves above 70, the Dow will enter the Trend Mode.  The 2-period RSI rose to 61.2, so, without a trend in place, the markets could begin to pullback.  I would view the pullback as a buying opportunity, but again, I’m not in any rush to buy stocks.  If the Dow is getting ready to decline in wave ‘C’ of Wave 2 down, I’ll begin to look for buying opportunities anywhere between 24,495 and 24,629. 

Students should keep in mind that IF Major Wave 4 triangle is over, and the recent breakout from the triangle is the start of Major Wave 5 up, the Dow should easily exceed the Major Wave 3 high of 26,617.  That’s still about 1,900 Dow points from current levels.  And IF Wave 5 up has a ‘through over’ rally before completing, the Dow could easily push significantly beyond 26,617, possibly reaching 28,000 or higher.  In other words, buying stocks now, even at current levels, has good odds for success.  Buying them when they’re in an Up Trend when the 2-period RSI becomes oversold increases the odds even further.  That’s why I’m watching to see IF the current pullback is wave ‘C’ down of Wave 2 Down.  IF it is, I want to buy stocks and ETFs in the strongest sectors when the 2-period RSI on the Daily Charts becomes oversold. Wave 5 up could be a nice ride.

BTW, if Wave 5 up begins as expected and my combination VTI-volume indicator moves into the Up-Trend Mode, that’s when I will become aggressive and HOLD stocks.  The Up Trend could last for months, maybe into 2019.  Remember, the Wave 4 triangle took almost 3 ½ months to develop and complete, so Wave 5 up could easily move into late 2018, early 2019 before completing.

Yesterday’s rally caused the Sector Ratio to improve to 14-10 negative.  This is still not what I’d like it to be to start buying, however it’s still 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.  Be patient.

Energy, Healthcare, Semiconductors, Utilities, Media, and Computers were the strongest sectors.  These are the sectors where I will be looking to buy stocks.  It was nice to see the Semis move back on the Strong List.  Now I want to see the Banks, and Financials start to improve.  Like I’ve been saying, I simply can’t imagine a Wave 3 of 5 rally starting without their participation. 

The weakest sectors were Household Products, Service, Food, Real Estate and Telecoms.  I’m avoiding these sectors completely.

That’s what I’m doing,

h

I’ll be traveling early tomorrow, so my next report will be the WSR.

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05-17-2018

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