Professor’s Comments May 4, 2016

Posted by OMS  at May 4th, 2016

The Dow fell over 230 points early and then rallied to close down 140 points at 17,751.    Volume was moderate, coming in at 105 percent of its 10-day average.  There were 97 new highs and 27 new lows.

Yesterday’s decline was enough to turn all four breadth indicators that make up The Tide negative.  So now I can start buying inverse ETFs as they appear on the Dean’s List.

Right now, the only inverse ETF on the List is the QID, the inverse ETF for the NASDAQ 100.  The inverse index ETFs for the Dow, S&P500, and the Russell 2K are still absent.  And with of a lot of the sector ETFs still on the List, The Dean is telling me that it’s still very early in the topping process.

Yesterday’s decline also turned the DMI on the Dow(DIA) negative.  So now both DMIs on the cockpit are negative.  When this happens, I always check in with The Professor to see if he’s confirming the start of a new downtrend.  Unfortunately, when I ran the algorithm, he only had 7 shorts which is not enough to confirm the start of a new down trend.  I usually like to see at least 50. When The Professor highlights 50 or more stocks as shorts, it usually leads to a decline of 750-1,000 Dow points.

Same for the Honor Roll.  Usually when The Tide turns negative, I start getting a lot of hits from the Emeritus algorithm.  But last night, there was only one stock highlighted as a short, (WFM) and it was a Weekly short which I found somewhat strange.

For example, back on 6 January, which was the last time The Tide turned negative, Emeritus highlighted 28 stocks as Weekly shorts. Last night he only had one. 

The difference between last January and now can be found in the trend indicators.  Remember, both Emeritus and The Professor are Trend algorithms. And right now, my custom VTI is still showing NO Trend for most markets.  The only index that is close to entering the Trend Mode is the NASDAQ.  It’s very close. A down day today could make it happen.

This trend indicator entered the Trend Mode on 6 January for the NASDAQ and on 7 January for the Dow and SPX.  It led to a 1,556 drop in the Dow.

So right now, with this Trend indicator just starting to come out of Uptrend territory on the Dow and SPX, it’s probably going to take a few more days before things get rolling to the downside.

BTW, the pattern that appears to be developing on the Dow and SPX is a Rounding Top.  This is a classic topping pattern that usually takes some time to develop.  But once the initial waves are completed, the pattern tends to mark the start of a significant decline.  The only issue I see now is that the indicators are telling me that it may be a few more days before the real down draft starts.

Bottom Line:  It’s still early in the topping process.  But with a negative Tide, I can start buying a few shares of the QID now that it is on the Dean’s List.  I’ll become more aggressive once I see the Dean’s List shorten and more inverse index ETFs start to appear on the List.  I also want to get confirmation from The Professor and Emeritus, something I don’t have yet.

That’s what I’m doing,

h

Market Signals for

05-05-2016

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