Weekend Strategy Review February 3, 2019

Posted by OMS  at February 3rd, 2019

The markets moved higher after the open on Friday in what appeared to be part or all of final wave of Wave 2 up.  At this point, with the key timing indicators still on Buy Signals, it’s still too early to tell if wave ‘c’ of Wave 2 up is complete, but the odds are increasing with every point the market moves higher.  Let’s just say I think we’re close.

Why do I say this when almost every commentator on the major business news networks are almost unanimously Bullish? Hmmm?  Well, for starters, they’re cheerleaders and not technical analysts.  They don’t look at indicators.  I do.

And what I’m seeing now is a market that is forming a classic retracement top.  I see it in the moving average of the Split Volume and other volume indicators I follow. BTW, Split Volume is an indicator that acts very similar to On Balance Volume (OBV). The thing I look for on this indicator is the divergences in volume.  When the volume doesn’t confirm a rise in price, it’s usually a sign the market is tiring.  The ‘older’ volume indicators, like Split Volume and OBV, are great for identifying divergences, but they are less useful as indicators for timing markets.  This is one of the reasons I developed my VTI-volume indicator, the indicator I use to generate the timing signals on the cockpit.  The VTI-volume indicator also identifies volume divergences, but it’s a lot faster in providing the signals you need to make trading decisions.  The ‘older’ volume indicators simply can’t do this.    

Anyhow, the negative divergences are there.  Now it’s just a matter of time before the markets start to roll over. 

The events surrounding last week’s Fed Meeting may have provided some clues.  Like I said in Friday’s Comments, when the market rallies on a Fed day and continues to move higher the following day, it usually leads to a lower market the following week.  So, IF the market begins to fall next week, Friday’s early rally into the 10:20 am high could have marked the top of Wave 2 up.  The decline that started after the 10:20am high could have been the initial waves of Wave 3 down.  We’ll see.

BTW, I want to talk a bit more about divergences, because you can see them for yourself.  You don’t need to see the Split Volume or OBV, all you need is the Volume Zone Indicator (VZO).  IF you pull up a chart of the Dow with the VZO (no I’m NOT going to show you this chart as an attachment.  That’s too easy.  Remember this is a teaching web site, so I want you to do it yourself.  If you do it yourself, you’ll learn a lot more.)  So, take the time to pull up a chart of the Dow and look for the divergence in VZO that occurred just before the market pulled back in October. As the Dow was making higher highs, the VZO did not.  The same thing happened in June 2019, which preceded a 1,300 point decline in the Dow. OK, one more…go back and look at the VZO going into the 29 January top.  Notice how the volume failed to rise with the price? It was classic negative divergence.  It led to a 3,000 point decline.

OK, so now that I have your attention, I want you to look at the VZO for the past two weeks.  Do you see the divergence?  Hmmm?  Now you know why I’m watching the market timing indicators on the cockpit and NOT listening to the cheerleaders.  If those lights turn Red, I’m getting short.

BTW, when you see divergences, ALWAYS draw a trend line connecting their tops.  That way you will be able to see them in the future.  The trend lines on your chart will serve as a reminder to ALWAYS look for divergences.  If I just gave you my chart as an attachment, you probably wouldn’t look at my chart six months from now.  But IF you draw the trend lines on your chart, you’ll always have them.

The Dow finished up 64 points on Friday, closing at 25,064.  It was up 327 points for the week. The NASDAQ was down 18 points Friday but was up 99 points for the week.

The Dow, NASDAQ, SPX and RUT remain on Buy Signals. If the market timing indicators for these indexes remain positive, the markets can continue to push higher. The Dean’s List and Tide also remain positive.

The Sector Ratio remained at 22-2 positive after Friday’s Session.  The Strong List was led by Semiconductors, Household Products, Real Estate, Transportation, and PharmaBio.  The two sectors on the Weak List were Food Drugs and Food.  I found it interesting that even though the Semiconductors have been leading the Strong List for the past few days, I still don’t have a Buy Signal from my VTI-volume indicator on Intel (INTC).  I did get a Buy Signal on MU on 1/18 at the 35.76 level.  MU closed at 39.38 on Friday.  So, the semis are moving higher WITHOUT Intel, the big name player in the most aggressive sector.  On the other hand, the Household Products sector, which is a defensive sector, is moving higher on Buy Signals from two of its largest players, Proctor & Gamble (PG) and Colgate Palmolive (CP).  This tells me that the institutions are starting to move money back into the defensive sectors.  This is EXACTLY what started to happen in early October, just before the market began its 3,000 point decline.

Pay attention to the negative divergences.  They are always the first warning signs of an impending market decline.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

02-04-2019

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.