Professor’s Comments November 15, 2017
Posted by OMS at November 15th, 2017
The markets had a volatile day yesterday. The Dow finished down 30 points after being down over 160 points intraday. It closed at 23,409. The NASDAQ and SPX finished down 20 and 6 points, respectively. Volume on the NYSE was moderate, coming in at 99 percent of its 10-day average. There were 113 new highs and 129 new lows. Once again, students should note the number of new lows is higher than the new highs.
Yesterday’s early decline was the Big Move predicted by Monday’s small change in the A-D oscillator. The decline was enough to turn the DMI on the SPX negative. This is the first time this index has been negative since 25 September. So now, the DMIs on three of the four major indexes (Dow, SPX and Russell 2K, are negative. The lone holdout is the DMI on the NASDAQ, which is still positive.
Yesterday’s decline also caused my VTI-volume indicator on the SPX to turn negative which is a Sell Signal for the index. So now the SPX and the Russell 2K are on VTI-volume Sell Signals. The Transportation index, as measured by IYT, the ETF for the trannies, is also on a VTI-volume Sell Signal. Yesterday, IYT fell 0.48 cents to 170.97. The ETF is now sitting on its lower trend line. A break of this lower trendline would likely mean a test of major support at the 200-day moving average currently located near 168.26
Why is this important? For the past few weeks, I have been talking about the historic relationship between the Dow Industrials and the Transports. Dow Theory says that both should rise together. When they start to diverge, it usually means trouble ahead for the Industrials. In other words, the Transports lead.
But why is the 168 level on the trannies so important? Well, if the trannies lead, they should be the first index to show a Wave 1 down decline. And Wave 1s are identified by a ‘Rope Jump’, or a drop below the 50 and 200-day moving averages. ITY closed below its 50-day moving average on 8 November. Now its flirting with the 200. If IYT falls below 168.26, it would identify the move as Wave 1 down in a new Bear Market. This is very important.
The reasons for a decline in the trannies are problematic. If these reasons were clear, a lot more investors would be bearish. But they’re not. It could be because the price of crude oil is rising, or it could be problems with the tax cut. It could also be that interest rates are starting to rise, which is causing the economy to slow. At this point, we really don’t have any idea what the real reason is. All we know is what we see in the charts. And the charts are telling us the Transports are diverging from the Industrials and are starting to move lower. Truth be told, I don’t care what’s causing the Transports to decline. All I care about now is that IYT is about to break below its 200-day moving average. Forget what you hear on CNBC or FOX business news, if IYT breaks below 168, it will tell you all you need to know about the future of the Dow Industrials.
That’s because the trannies do not operate in a vacuum. They are only one sector, but a very important sector. So, when I see the trannies start to diverge from the Dow Industrials, especially after I can count five Major Waves since this Bull Market started in March 2009, I start getting concerned. Then when I see the Fifth Wave of this five wave sequence, which started just after the November 16 election, form a Major Ending Diagonal Pattern, I start looking for a top. The divergence between the trannies and the Industrials is a major warning.
But like I said, the trannies don’t exist in a vacuum. They operate with other stocks and other indexes. So yesterday, when I saw the DMI on the SPX turn negative, joining the negative DMI on the Dow, I’m ‘on my toes.’ (BTW, I use this expression because this is one of the things I look for in a race horse, just before it enters the starting gate. It tells me the horse is ready to run.) In other words, we now have the Dow, SPX, RUT, and the trannies with negative DMIs. And the trannies are about to break below 168, which would identify the move as Wave 1 down in the next Major Bear Market.
Are you still wondering why I’m concerned? Are you ‘on your toes?’
At this point, I’m sort a few shares of IYT, and long TWM, the ETF for the Russell 2K. If the Dow and SPX have topped, it’s still early in the topping process for me to get aggressively short. Besides, the two Money Flow indicators on the cockpit (the Coaches) are still positive, and until I see them turn negative, I know the Big Boys are still putting money into the market, especially on the dips. We saw that yesterday when the Dow was down over 160 points. We also saw them buy the dips several times last week. At some point, the Big Boys will start to recognize what’s really starting to happen, and their buying will slow. Then, when their buying stops, those 100-point declines will turn into 2-3 hundred-point declines and the major decline I see coming will be on.
BTW, on the very short-term charts, yesterday’s early decline and late pullback in the Dow and SPX could be the start of something bigger. They could have been sub-waves 1 down and 2 up of Minor Wave 1 down. If this is the case, we could see a large decline (sub-wave 3 down) today. Again, if this happens, it’s just another clue that the market is topping.
Tuesday’s Sector Ratio was unchanged. It remains at a neutral 12-12. The Strong Sectors were led by Semis, Energy, Cap Equipment, Real Estate, and Computers. The Weak Sectors were led by Service, Telecoms, Consumer Products, Household Products, and Retail. Continue to stay in stocks and ETFs in the strong sectors and avoid or short those in the weak sectors. Continue to watch for changes in the Sector Ratio. When the Bear starts to growl, the Secor Ratio won’t be 12-12. It will be more like 3-21 negative. There won’t be many places to hide.
For now, make sure you have your protective stops in place. Manage these stops aggressively. If the price of your stock moves up, make sure you move your stop up too. Also think about taking a few bucks off the table at current levels or consider establishing a few ‘trial’ short positions. Remember, Sky Rocket rallies never end well. Think about doing some selective pruning, especially if you’re holding a stock in a Weak Sector. Continue to watch the Sector Ratio closely. Now is NOT the time to be aggressive on the long side.
Protect yourself!
That’s what I’m doing,
h
Market Signals for
11-15-2017
DMI (DIA) | NEG |
DMI (QQQ) | POS |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
SUM IND | NEG |
VTI | NEG |
One hour video recorded from May 28, 2016 The Professor’s Signs of a Major Market Turn – Prospectives and the Projected Timing and Levels One hour streaming video – includes webinar handouts The Professor usually holds an update class whenever the Market looks like it may be making a major turn. If you have been following the Professor’s Comments you know that a turn is due….. LEARN MORE
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The Hockey Stick Pattern
The Creation of Waves and Trends
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Category: Professor's Comments