Professor’s Comments November 16, 2017
Posted by OMS at November 16th, 2017
The markets fell hard yesterday. The Dow was down 138 points, closing at 23,271. The NASDAQ and SPX were down 32 and 14 points, respectively. Volume on the NYSE was moderate, coming in at 95 percent of its 10-day average. There were 84 new highs and 150 new lows.
Yesterday’s decline was likely sub-wave 3 down of a five wave sequence for Minor Wave 1 down. The decline caused the 2 period RSI to finish at an extremely oversold level of 3.07. So, with the VTI still NOT in the down Trend Mode, the markets should bounce today. It will be the extent of the bounce that will give us a clue as to whether the markets have topped.
Remember, only three of the major indexes, the Dow, SPX and Russell 2K, have negative DMIs now. The DMI on the NASDAQ is still positive, even after yesterday’s hard decline. So, from an index perspective, the markets are still mixed. There are still some very strong stocks in the NASDAQ, like AMZN, AAPL, and GOOG, that have positive indicators, and will need additional time before they start to roll over. And because the Money Flow indicators are still positive, there will still be some institutional buying on dips like yesterday. Like I said, it’s still very early in the roll over process.
But with a negative Tide and a Hi-Lo ratio that’s almost 2-1 negative, it’s going to be hard for the market to make a new high on the coming bounce. I look at it as a potential shorting opportunity.
Here’s the thing: When I look at the SPX, it appears that two scenarios are possible. The thing I find troubling is that the decline since 8 November was NOT impulsive, but rather took the shape of an a-b-c sequence. Anytime I see a-b-c moves, especially after the market made a new high, I must think about the possibility of a triangle forming. In other words, the market needs a rest. And because Money Flow indicators are still positive, it’s also possible after making a new high, the decline since 8 November could also develop into a small Bearish Wedge, which in this case would be another (smaller) Ending Diagonal. Bottom line is that if this is happening, the SPX will likely chop higher in five waves and probably top in late November or early December.
The key levels to watch now on the SPX are 2,557 (yesterday’s low) and 2,545, which is the 50-day moving average. Remember, the SPX has still not broken below its 50, so technically, it’s still in an UpTrend, even though it has a negative DMI. Also, after yesterday’s trading, the 2-period RSI on the SPX had an oversold reading of 4.7, so without a trend in place, it’s likely we could see a small rally develop which would be wave ‘c’ of the triangle. My projections for this wave are near the 2,600 level….IF the triangle develops. No guarantees.
On the other hand, if you look the chart closely, you will see that a small Head & Shoulders Pattern has also developed on the SPX since 23 October. The ‘Head ’of this pattern is 7 November high. So after yesterday’s decline, it’s also possible that yesterday’s low was the right shoulder of this H&S pattern. That’s why the 2,557 level is soooooooo important now. If 2,557 is broken, the SPX isn’t going anywhere but down. Head & Shoulder Patterns are major reversal patterns, and are usually found at market tops.
So like I said above, we currently have two patterns working. One that could form into an Ending Diagonal, which is terminal, and one that is a key reversal pattern.
Students also need to consider that the next few weeks are historically very bullish for the markets. But once we get past Thanksgiving and into December, that Bullish Holiday/end of month bias tends to disappear. So even if the SPX rallies into early December, I believe it will be a better shorting opportunity than anything else.
There are two other reasons why I believe the markets will develop a small rally from current levels before falling. Yesterday, the transports as represented by IYT, fell another 0.95 cents to 170.05. In doing so, they tested lower trend support, and bounced. And as the price made a new low, the 2-period RSI did not. So there was positive divergence between price and the RSI. This often leads to rallies, especially after a big decline. ITY also needs time to move sideways to up now, to form a ‘Blade’, so the next time it approaches its moving average, it will be able to bust through. After falling over 10 points from its 13 October high of 181,57, the ETF will likely rally back to its 50-day moving average, near 174-175, to form the right shoulder of a large H&S Pattern. I covered my shares of ITY yesterday, and will look to re-establish my short position near the 174-175 level.
The other reason I believe we’ll see a small rally here is the Sector Ratio. Yesterday, even though the market fell pretty hard, the ratio actually increased to the positive side. It moved to 13-11 positive, as the transports moved back on the Strong Sector List.
The Strong Sectors were led by Semis, Leisure, Insurance, Banks and Real Estate. The Weak Sectors were led by Service, Telecoms, Household Products, Retail, and Food. 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. As long as the Sector Ratio maintains its positive bias, the markets will likely continue to form their topping patterns into early December. But once we get past the Thanksgiving Holiday, please pay attention to any negative change in the ratio.
BTW, yesterday we saw another Republican Senator, Ron Johnson of Wisconsin, come out against the proposed Tax Plan. I found it interesting that he said pretty much what I’ve been saying, that the plan unfairly benefits large corporations at the expense of small companies and individuals. Good for him! I don’t see how decreasing taxes from 35 to 20 percent for the large corporations will do anything to create new jobs in America. It’s small businesses and individuals that create 70 percent of the jobs. We need to help them. All lowering taxes for the big guys will do is increase share buybacks and takeovers. None of this financial wizardry will create good paying jobs, which is what America really needs to get its economy growing again.
The reason I mention this again today is because IF the proposed tax bill fails because of insufficient votes, it could trigger the next market decline.
Protect yourself! Watch the 2,545 level on the SPX. If the SPX moves below that level, the odds are high that the Bull Market that started in March 2009 is over.
That’s what I’m doing,
h
Market Signals for
11-16-2017
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 |
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