Professor’s Comments October 17, 2018

Posted by OMS  at October 17th, 2018

The markets were sharply higher yesterday, retracing a good portion of the recent decline.  The Dow finished up 548 points at 25,799.  The NASDAQ and SPX were up 215 and 59 points, respectively.  Volume on the NYSE was low, coming in at 93 percent of its 10-day moving average.  There were 14 new highs and 95 new lows.

I expected the markets to bounce yesterday, but not to the extent they did.  I was looking for a rally of about 100-150 points, possibly to the 25,350-25,400 level, but once the rally started, short covering took over and pushed the market higher.  The rally didn’t do anything to change my indicators, as they remain on Sell Signals.

BTW, yesterday’s short covering rally is worth a comment.  During the initial stages of a Bear Market, many traders have started to establish significant short positions. So, when the market starts a small rally, like the one we saw early yesterday, the rally can continue as more and more traders become concerned and start covering (buying back) their short positions.  This short covering was what caused a ‘normal’ 150 point rally to turn into the 548 point rally we saw yesterday. 

During yesterday’s session, I was listening to a few commentators on Fox News say the markets were rallying after testing moving average support.  In other words, according to them, the moving average support held, so the markets could now move significantly higher.  Hmmm? 

Their comments caused me to check the moving averages on the Dow, NASDAQ, SPX, and Russell 2k.  It appears that what actually happened is that the 30 Dow stocks bounced after falling slightly below their 200-day moving average.  The Dow got as low as 24,899 on 11 October while the 200-day moving average was at 24,945.  So, the Dow actually fell about 46 points below its moving average before bouncing.  In other words, rather than testing moving average support, the Dow made a ‘Rope Jump’.  Hmmm?  This is a significant difference.

What about the other indexes? Did they also make ‘Rope Jumps’? 

The NASDAQ also fell and closed below its moving average on 11 October, when it hit a low of 7,274.  The 200 on the NASDAQ was at 7,483.  So, technology stocks were well below their 200 before bouncing.  Same for the S&P500 and the Russell 2K.  The Russell was the index to get hit the hardest, falling to a low of 1531 with the 200 at 1620.  So, even with yesterday’s rally, the small cap RUT is still BELOW its 200-day moving average.   

Why is this important?  Well, it’s one thing to bounce after testing moving average support that holds.  This is usually a very positive sign.  However, when a market bounces after falling below its 200, it’s an entirely different scenario.  It usually means that the move down was a Wave 1 and the corrective rally that follows is part of Wave 2 up. The important thing about all this is that once there has been a ‘Rope Jump’, you can no longer say that stocks are still in a Bull Market.  The ‘Rope Jump’ changed all that.  By moving below the 200, the markets have identified the recent decline and yesterday’s retracement rally as part of the next Bear Market.  I didn’t hear any of the Fox commentators talking about this yesterday.

Also, given that the four major U.S. indexes are in slightly different patterns, I’m still not sure that Wave 1 down is complete on all the indexes.  The Dow is still trapped between its 50 and 200 moving averages. The 2-period RSI is overbought (78.6), so while it can trade up to its 50, it will likely have a tough time moving above 25,923 where the 50 is currently located.  Now the 50 will act as overhead resistance.

Same for the other indexes, especially for the Russell.  The 1620 level on the Russell should act as an overhead wall to that index.  So, I would look to fade any rally from current levels (1597) that approach 1620.

Again, with my VTI-volume indicators on Sell Signals, I’m NOT as positive about yesterday’s rally as the Fox commentators.  Not even close.

The only change to the indicators after yesterday’s session was to the Hi-Lo indicator.  It turned the slightest bit positive, making The Tide neutral.  The Summation Index, A-D oscillator and Up-Down Oscillator remain negative.  The A-D oscillator rose to a reading of -25.3. telling me that most stocks on the NYSE remain in down trends.

I’m getting the same story from my Sector Ratio.  It rose to 4-20 negative after yesterday’s session.  Seeing 20 negative sectors is not still enough to get me excited about the long side.  Also, the four sectors that made the Strong List, Utilities, Telecoms, Energy, and Media, are defensive sectors. This tells me that the institutions continue to be concerned about where they put their money to work.

Gold was flat to down yesterday.  The Buy Signal on GLD remains in effect, but like I said yesterday, now that the ETF has moved above its 50, it probably needs to consolidate for a few days to get enough energy to test the 200.  There’s a lot of support for GLD near the 114 level, so I would view any pullback close to 114+ as a buying opportunity.  

That’s what I’m doing,

h

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10-17-2018

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