Weekend Strategy Review April 3, 2016

Posted by OMS  at April 3rd, 2016

The Dow rose 108 points on Friday, closing at 17,793.   It was up 277 points for the week.  The NASDAQ was up 45 points on Friday and up 141 points for the week.

After the BLS released the Jobs Report numbers for March, the Dow fell 117 points before turning around to gain 225 points.  It was a wild day!  The actual numbers in the report were pretty mixed, with new jobs increasing by 225K as unemployment rose to 5 percent.

The thing I found most interesting about the report was the quality of the jobs being created.  Most of the new jobs were in the retail trade, food services and drinking establishments.  A total of 29,000 high paying manufacturing jobs were lost.  Retail jobs now outnumber those in manufacturing by 3,651,100.

So the trend continues.  As a nation, we continue to shop for stuff made in China and eat at the local McDonald’s on the way.  And unless something changes, our high paying manufacturing jobs will continue to be replaced by low paying or part time jobs in the retail and food service industry.  This won’t impact most of us geezers, but it will impact our grand kids.  It’s something to think about.

Interestingly, McDonald’s (MCD) was up 1.34 on Friday.  It rose even though it’s Money Flow indicator remains negative.  I mention MCD because it’s pretty representative of the current market.  The Money Flow indicator on the stock reached its peak on 21 March with the stock at the 123 level.  On Friday the stock closed 4 points higher, just above 127, but the Money Flow indicator is several points below where it was on 21 March.  That’s classic negative divergence and is usually a warning of trouble ahead.

This weekend, all of the indicators on the cockpit, including The Tide and the Dean’s List remain positive.  However, from an overall strategy perspective, even though The Tide and Dean’s List remain positive, students should realize that the current rally appears to be getting very long in the tooth.  The Ending Diagonal Pattern on the Dow has all of the required waves, so it could reverse course and start falling at any time now.  The fact that the Money Flow and breadth indicators are diverging, just like they are on MCD, is also a warning.

Could the market continue to push higher?  Yes.  Remember, the Ending Diagonal is also a Major Wave 2, and as such it’s impossible to tell where it will end.  I originally though it would end near the 17,200 level.  But the final ‘through over’ wave is now almost 600 points above that estimate.  Some might ask how can that be?  Well, as I’ve said many times before, there is no way to tell where a wave 2 will end.  A technicians can only make estimates for retracement waves, and these estimates are often wrong.  That’s because estimates based on Ellliott Waves analisis tend to work best in the primary trend. They are not as good in retracement waves. This is why when it comes to technical analysis, I always say that wave 2s seem to have a mind of their own.

For example, last summer, when the Dow was rising, it was pretty easy to predict that the market would top near 18,350. That was a wave 5. It was also pretty easy to predict the decline to 15,450. That was a wave 1 down. But wave 2s? Not so easy. Once it was apparent that wave 1 down was nearing completion, we waited for The Tide and the other indicators to turn positive. When they did, they told us that retracement wave 2 up was starting. The target I used was the 200-day moving average near 17,100. Anything above that was in never never land. I estimated another 100 points or so for the final ‘through over’ wave to get 17,200. But as we have seen, this proved to be on the low side.

This is why I follow The Tide.  Since The Tide turned positive on 16 February, the Dow is up 1,597 points!  Like I always say, “Follow The Tide”.

BTW, on Friday, even though the Dow finished up 108 points, both the A-D oscillator and the Up-Down oscillator actually declined!   Friday’s A-D oscillator reading was only 39.1, down from the previous days reading of 72.4.  In other words, one decent down day early next week could turn the A-D oscillator negative.  This is NOT something you would want to see if you are Bullish.

Bottom Line:  The Dow appears to be in the final stages of completing a Major Ending Diagonal Pattern for Major Wave 2 up.  Once the current rally completes, stocks should start to fall hard.  The Money Flow and breadth indicators are showing major divergences, which are RED FLAG warnings.  However as long as The Tide remains positive, the markets could continue to push higher, even with these warnings.  In this environment, all I’m doing is following The Tide.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

04-04-2016

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