Professor’s Comments October 11, 2018

Posted by OMS  at October 11th, 2018

The markets got clobbered yesterday.  After several weeks of warning from our breadth indicators, which were showing severe negative divergence, prices finally caved. Technology stocks on the NASADAQ got hit the hardest with the index finishing down 316 points at the close. It was not a good day to be holding FANG stocks.  The Dow, which was the last holdout on my VTI-volume indicator, finally turned negative, joining the NASDAQ, SPX and Russell 2K on Sell Signals.  The large cap index finished down 832 points at 25,599.  The broader SPX was down 95 points. Volume on the NYSE was heavy, coming in at 128 percent of its 10-day moving average.  There were 34 new highs and an incredible 502 new lows.

In yesterday’s Comments, I talked about the downside targets that the Ending Diagonal and Rising Channel Patterns for the Dow and NASDAQ were projecting.  When I first mentioned these targets several weeks ago, I’m sure several of my students gasped, thinking there’s no way the Dow would drop to 24,000. But after yesterday’s rout, that that target probably seems a lot more realistic, as now its only 1,600 Dow points away.  Another down day like yesterday, would put the target within immediate striking distance.

Anyhow, that’s probably NOT going to happen at least for another few weeks.  That’s because yesterday’s downdraft was likely only part of wave 3 down within Wave 1 down.  Once complete, and yes…it will complete, the markets will likely start to develop a complex wave 4 that will retrace a portion of wave 3 down.  Wave 4 will likely develop as a five wave triangle.  Once complete, Wave 5 down should begin to take hold, dropping the Dow close to the 24,000 level or slightly below.  This is what the pattern suggests will occur, and yesterday’s impulsive decline just increased the odds of that happening. 

The reason I say this is because yesterday’s impulsive decline occurred right on schedule.  The broad based NASDAQ Composite reached its high of 8,133.3 on 30 August.  Since that high, the index fell to its 50-day moving average in what appeared to be wave 1 down.  After spending a few days near the 50, the index bounced in an a-b-c rally for its wave 2 up.  During the rally, the Bollinger Bands tightened to extreme levels, so once the Sell Signal was generated on 5 October, the conditions for the impulsive wave 3 decline were in place.  With the NASDAQ, SPX, and Russell 2K all on Sell Signals, it was only a matter of time before the 30 stocks in the Dow threw in the towel.

Anyhow, that was yesterday.  So, what happens now? 

It’s likely that wave 3 down is NOT complete.  What it needs now before it can rise is a day of capitulation selling.  The market needs to make its low and then re-test that low before it can move higher.  The decline needs to flush out all the sellers.  Yesterday, each low was followed by more selling which tells me we’re probably still several hundred Dow points away from the bottom of wave 3 down. 

The Sector Ratio closed at 3-21 negative after yesterday’s session.  That’s the lowest reading of the Ratio since I introduced the Sector Lists.  What’s interesting about the Lists and the Ratio is that with the exception of a few days, the Ratio was positive since inception, telling us that he market was healthy and most of the sectors were moving up. But that started to change last week when the Ratio began to decline turning 12-12 neutral on 4 October, and finally turning 10-14 negative last Thursday.  So, the Sector Ratio was giving us a ‘Heads Up’ that the market was in trouble four full days before yesterday’s rout.  Hmmm?  CNBC and Fox News didn’t do that.  My VTI-volume indicator and Tide gave similar warnings with Sell Signals several days before the rout.  Days!  The Dean’s List had QID, TWM, SDS, and several other inverse index ETFs on the List.  Cramer didn’t have the Dean’s List, so he continued to hit his Buy Button.  Like I have been saying, it pay$ to watch the signals.  All of the inverse index ETFs I bought last week based on the signals were up big yesterday.

The three sectors on the Strong List are Utilities, FoodDrugs and Telecoms.  The Weak Sector List was led by Semiconductors, Consumer Products, Service, Retail, Autos, Technology and Transportation. 

BTW, the Weekly VTI-volume indicator on IYT, the Dow Transportation ETF, turned negative after yesterday’s session.  I mention this because CSX, one of the country’s major railroads, is located in Jacksonville, and many of my students are employed by the company.   IYT recently completed a Three Highs to a Top Pattern on 14 September at the 209.43 level. The Weekly DMI turned negative after yesterday’s session.   So now the transportation index is among the leaders on the Weak Sector List, and has a THT Pattern with a negative DMI.  Hmmm?  The pattern suggests the first target is the February 2018 low of 176.2. with an eventual target near the January 2016 low near 114.9.  Yesterday IYT closed at 189.78.

Gold was relatively flat yesterday with mining stocks up slightly.  GLD finished up 0.28 cents at 112.88.  The ‘Green’ VTI-volume indicator on the Dollar continues to put pressure on gold.  However, there was a significant improvement in the volume portion of the VTI-volume indicator on GLD after yesterday’s session. So, all we need now is for the momentum to turn positive and we’ll have a Buy Signal.  BTW, I’d feel a lot better about a Buy Signal on gold (GLD) if the same signal on the Dollar turned negative. I’d also like to see UUP, the positive ETF for the Dollar be replaced by UDN on the Dean’s List.  If this happens, I’ll load a truck with my gold purchases.  Gold is in the process of completing its Major Wave 2 with Major Wave 3 up next.  The pattern on GLD suggests Major Wave 3 could take gold prices significantly higher and last for years.

Students should continue to watch NUGT on the daily charts.  The Bands continue to narrow as the leveraged mining ETF continues to form the right shoulder of its inverse Head & Shoulders pattern. IF NUGT can break above the 14.41 level, the pattern suggests a move to the high teens.   The 50-day moving average is currently located at 14.9, so a move above this level would be very positive step in the turn-around process for gold. 

I will be traveling to Orlando this weekend to spend some quality time with my granddaughter.  Because of this, I will not be publishing Comments tomorrow.  My next post will be the WSR on Saturday, probably late in the day. BTW, IF something unexpected happens and things change radially from what I outlined above, I’ll post a few Comments. 

From all appearances, the initial waves of the next Bear Market are starting to develop.  The market won’t go straight down. There will be strong retracement rallies along the way.  Be careful and protect yourself. 

That’s what I’m doing,

h

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10-11-2018

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