Weekend Strategy Review July 22, 2018

Posted by OMS  at July 22nd, 2018

The Dow was down 6 points on Friday, closing at 25,058.  It was up 39 points for the week.  The tech heavy NASDAQ was down 5 points on Friday, and down 6 points for the week. 

The markets still appear to be worried about the possibility of a trade war with China and the European Union. 

While my indicators for the U.S. markets remain mostly positive this weekend, they’re not looking all that good for the markets overseas.  This could spell trouble for U.S. stocks in the weeks ahead.

If you look back at the Chinese market since the November 2016 election, you would see that it has risen in lock step with the Dow as the U.S. markets moved higher. But since the talk of a trade war started in early June, the Chinese market has lost ground compared to the Dow.  FXG, the inverse ETF for China, currently leads the Dean’s List. 

Same for Europe.  I find it interesting to note that none of the European country ETFs, like EWG (Germany), EWQ (France), or EWD (Sweden) are on the List, nor are EWC (Canada), EWJ (Japan), and EWA (Australia).  This tells me that even though the U.S. markets are holding their own, the rest of the world is weakening.  This dichotomy in markets won’t last for long.  Sooner or later all the world markets will start to trade in the same direction.  That’s because we all trade with each other.  When free trade exists with no tariffs, goods and services flow across boarders and benefit everyone.  When tariffs are imposed, the flow of goods and services slows is disrupted.  Companies have a difficult time predicting how much these ‘artificial’ disruptions will impact their production, so they tend to slow down.  They don’t want to get stuck with a lot of inventory.  All this slows sales which eventually starts to impact the price of the company’s stock.  This is what’s starting to happen now.

This is the reason I’m exercising caution this weekend. We simply don’t know the extent to which the tariffs that President Trump continues to talk about are going to be applied.  Are they for real?  Are they a tactic for negotiations? Or are they being applied for other purposes, like trying to slow the flow of American technology to China?  In my opinion, the latter is the real problem. It has serious long-term consequences.

Anyhow, for whatever reason, the tariffs and the potential for a full blow trade war appear to be impacting the markets.  And until this uncertainty is resolved, I don’t see how the U.S. markets can push much higher.  

This week, I talked a lot about how the Dow continues to experience resistance at the upper trend line of its Major Wave 4 triangle.  And as long as the Dow stays below 25,250, there’s a growing possibility that it will re-test the 24,000 level in another leg down of the triangle.  This can easily happen if the Chinese and European markets continue to weaken. 

DXD, the inverse ETF for the Dow is back on the Dean’s List, but as of this weekend, my combination VTI-volume indicator remains positive and on a Buy Signal.  The VTI portion of the indicator is still NOT in the Trend Zone with a reading of 69.3.  So, after two days of pullback, the Dow is not terribly overbought (2-period RSI reading of 33.1), but IF the pullback continues, it could drop the volume portion of the VTI below zero generating a Sell Signal.  If this happens, with DXD on the Dean’s List, the odds for a decline to 24,000 would increase significantly. 

So, like I said, it’s time to exercise caution.

BTW, another reason for caution has to do with The Professor’s algorithm.  On 6 July, when The Professor highlighted more than 50 stocks, he predicted a move of at least 750 points. That prediction came true on 18 July when the Dow hit its recent high of 25,215 for a total of 759 points.  In other words, the move predicted by The Professor happened.  It’s over.  So now the market is free to do something else. 

The Sector Ratio remains positive, but it dropped to 14-10 on Friday.  The defensive sectors like Retail, Food Drugs, Consumer Products, Healthcare and Foods continue to lead the Strong List.  Seeing these issues at the top of the List is another reason for caution.  If the Sector Ratio continues to fall and turns negative next week, it would be yet another reason for caution.  Like I said above, the possibility for a decline to Dow 24,000 is real.   

Gold and the miners rose slightly on Friday.  However, my combination VTI-volume indicator for GLD and SLV remains on a Sell Signal.  I’m not doing anything with the metals until my VTI-volume indicator turns positive.  Then I’ll load the boat!

That’s what I’m doing,

h

Market Signals for

07-23-2018

FAQ

Only getting the Professor’s Weekend Review? Try his daily update Cum Laude service for 2 weeks only $9.99 LEARN MORE

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.