Professor’s Comments November 13, 2018

Posted by OMS  at November 13th, 2018

The markets fell hard yesterday. The Dow finished down 602 points at 25,387.  The NASDAQ and SPX fell 206 and 55 points, respectively. Volume on the NYSE was moderate, coming in at 90 percent of its 10-day moving average.  There were 59 new highs and 131 new lows.

Yesterday’s impulsive decline appeared to be the start of Wave 3 down of Major Wave 1 down.  The decline occurred after a negative Evening Star candlestick pattern and a Bollinger Band Sell Signal. The decline turned the DMI on the Dow negative, however my VTI volume indicator on the same index remains neutral.  This tells me that the Dow will likely try to bounce today to recover some of yesterday’s losses before the next decline wave begins. 

Students should remember that the Dow is still trading above its 200-day moving average.  So, before any real down draft can occur, the Dow will need to break below its 200 currently near 25,025 level.  And before this occurs, the Dow will likely test and re-test its 50 and 200, causing significant up-down-up volatility. The NASDAQ, SPX, and Russell 2K (RUT) are already below their 200, so they can decline more easily.  The 50 day moving average on the RUT is also below its 200, so the RUT is now officially in a downtrend.  With the RUT is currently trading at 1519, the 200 on the Weekly chart located at 1381 now becomes an obvious target.

Domestic small cap stocks on the RUT and technology stocks on the NASDAQ are getting hit the hardest now.  Small cap did not benefit as much from the tax cut so as the Fed tightens the money supply, they are finding it harder and harder to operate and/or expand.  Most of the Big Boys in the Dow either stashed most of the 40 percent  tax cut or used it to buy back shares, so they have not been impacted as much by the reduced level of money available. But they will. This is one reason why the larger Dow stocks, especially the ones that are defensive in nature, are holding up better than the small caps for now.

Students should take the time to compare a chart of the RUT with the Dow.  They should note how both indexes started the Bear Market by falling below the moving averages in late October.  However during the retracement Wave 2 rally, the RUT did not rally as hard as the Dow, mostly  because institutional money was now shifting into the more defensive issues. This caused the RUT to spend more time trading below its moving averages than the Dow which brought the 50 down to the 200 faster.  So now that Wave 2 up appears to be complete, with the 50 on the RUT now below the 200, it’s a lot easier for the RUT to move lower.  This is why the ‘troops’ usually lead the market Generals (the Dow) lower in a Bear market.  It’s also why the RUT, NASDAQ, and SPX are all on VTI-volume Sell Signals while the same signal on the Dow is still neutral.

The Sector Ratio remained at 8-16 negative after yesterday’s session. The Strongest Sectors were Service, Insurance, Food Drugs, Media, Household Products, and FoodDrug.  I should mention that even though there are eight positive sectors on the Strong Lost now, they are NOT that strong.  Except for the Service sector which has a RS Rating of 3, all the others are mostly 1s and zeros.   This contrasts with the mostly 3’s on the Weak Sector List which is led by Energy, Technology, Semiconductors, Transportation and Cap Goods.  Just seeing the RS ratings of the Strong vs. Weak Sectors tells me this is not a good time to be buying or holding stocks. I don’t have to look at a chart to tell me this is an EXTREMELY weak market. 

Gold continued its decline yesterday with GLD dropping 0.82 cents to 113.66.  The extremely strong dollar continues to impact gold’s ability to rise.  At this point, gold remains oversold without a trend in place, so it should rally.  However, its 35 period CCI is now moving south at an alarming rate and is now at -55.7.  IF the CCI starts to move below -100, GLD will enter the Down Trend Mode which will likely lead to a re-test of the August low of 111.1.  Students should note how the CCI on UCO, the ETF for Crude Oil dropped below the -100 level on 23 October and how this led to a decline that oil is currently experiencing.

BTW, with Crude OIL now trading under 60 a barrel, it’s becoming very interesting.  Since 3 October, the move on UCO has been straight down dropping from 36.6 to 23.26.  The 2-period RSI on USO is currently EXTREMELY oversold at 0.03. However the ETF is now in the Trend Mode, so the RSI can remain oversold.  IF UCO can stop its downtrend and bounce from its oversold conditions, the bounce could turn into a rally back to the 200 day moving average near the 29-30 level. It’s one of the reasons I’m watching UCO on the short-term bars now.

That’s what I’m doing,

h

Market Signals for

11-13-2018

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