Weekend Strategy Review November 11, 2018

Posted by OMS  at November 11th, 2018

The Dow fell 202 points on Friday, closing at 25,989.  It was still up 718 points for the week. The NASDAQ was down 124 points on Friday, but up 50 points for the week.

Friday’s opening gap down completed the Bearish Evening Star Patterns on the Dow, NASDAQ, and SPX.  Evening Stars are usually reliable Sell Signals, especially when they gap lower on volume that is higher than the first day of the pattern.   Friday’s decline also caused my VTI -volume indicator on the NASDAQ to generate a Sell Signal for technology.  The same indicator on the Dow remains positive, but the volume portion of the two-part indicator is now heading down and is close to turning negative.  The volume portion of the VTI-volume indicator is already negative on the SPY, but the momentum on the broad based index remains positive, so overall, the SPY is on a Neutral Signal.  The small cap Russell is on a Sell Signal.

So, with mixed signals from my market timing indicators for equities this weekend, it’s starting to look like Wave 3 down is starting. We’ll get confirmation IF the VTI-volume indicator on the Dow turns negative early next week.  With the Dow and the other major indexes having reached pattern targets, we need to be looking for signs that retracement Wave 2 up has completed, and Wave 3 down is starting. We got several of those signs on Friday.

If wave 3 down has started, the Dow could trade down to the 23,500 level or lower before it completes.  My initial target for Wave 3 down is the 23,500 level, but IF the volume and momentum pick-up, the Dow could easily decline below 23,000.  Last week’s rally was accomplished on EXTREMELY light volume, so in a way, the retracement rally was misleading.  It should NOT have risen above 26,000 like it did, but because the pre-election volume was so light, a few institutions were able to squeeze a few short traders pushing the index 278 points higher than expected.  So, if the ‘real’ target for Wave 2 up was somewhere between 25,850- 26,000, it means that any downward projections should begin from 25,850, and not 26,278.  This would put the target for Wave 3 down a few hundred points below the 23,000 level.  In other words, please be careful with your trading now.

From a positive perspective, the Dow is still trading above its 50 and 200-day moving averages.  So, it still needs jump two ropes before its decline can begin in earnest.  The moving averages should provide some support on any move down.  However, the NASDAQ is already below its 50 and 200-day moving averages, so it can decline more easily.  I would expect the NASDAQ to lead the other markets down, mostly because the institutions are still putting money into the larger ‘defensive’ issues on the Dow.   We can see this by looking at the sectors on the Strong Sector List.  It’s not an opinion, it’s a fact!  BTW, you can also see that there are no technology sectors issues on the Strong List now.  There haven’t been any on the List for weeks!  This should also tell you something about the strength of the NASDAQ.  That’s why I believe it will continue to lead the market down as Wave 3 down unfolds.

The Sector Ratio fell to 8-16 negative after Friday’s session.  The Ratio got as high as 11-13 negative late last week, as the final rally charge, wave ‘c’ of Wave 2 up, took place.  Students should note how the Sector Ratio NEVER went positive during the retracement rally.  The highest it got was 11-13 negative.  And now it’s moving lower again after Friday’s decline.  Pay attention.  Again, this is not my opinion.  The Sector Ratio is generated by an algorithm.  Algorithms don’t have opinions like the entertainers on Fox News or CNBC.  By being negative, the algorithm is simply telling you that most of the sectors in the S&P 500 are negative and heading down.  And that’s NOT a good environment for buying stocks.  It’s a good environment to be shorting them!

One other thing from a strategy perspective this weekend.  Have you noticed how the market timing signals for Crude Oil and Bonds have been right on?  Take a look at the UCO, the ETF I use to trade Crude Oil. Since the ETF generated its negative signal, the UCO has fallen like a rock.  The move has been straight down.  Same for Bonds.  Since its timing signal was generated in early September, bonds have continued their decline. Hmmm?

You might be wondering why I’m mentioning this now?  Well, firstly, the volume portion of my VTI-volume indicator for Bonds (TMF) is starting to rise.  So, IF the equity markets are beginning their Wave 3 decline, a lot of the money in equities will likely start moving into Bonds.  TMF and TLT might be nice places to be. 

Same for Crude Oil and other commodities.  Right now, Crude Oil is getting hammered.  There’s too much of it around and no place to store it, so the price is falling.  But remember, September, October, and November are NOT the best months to be trading Crude Oil or energy.  February-May are the best months, and they are just around the corner.  So once again, I want you to go back and look at the timing signals that were generated for Crude Oil and Bonds.  BTW, the original negative signals for Bonds and Crude Oil were on 4 September and 17 October, respectively.  The dates shown on the cockpit are only the re-short signals that were generated after the original signal turned neutral.  Again, a neutral signal is NOT a positive (buy) signal.  All it’s telling you is to be careful, that a signal change could be approaching.  Bottom Line:  Pay attention to the signals for Crude Oil and Bonds.  If the market begins to decline, money from the equity markets should begin to move into these sectors.  You don’t always have to be in equities to make money.  TMF and UCO are leveraged ETFs, so IF they move to a Buy Signal during the next week or so, I’m a buyer. Watch the signals.

BTW, TMF and TLT just finished making a Three Lows to a Bottom Pattern.  So, watch for a DMI turn.  Could happen within the next few days.

BTW, I saw that gold (the metal) generated a Sell Signal on Friday.  GLD fell 1.33 points to 114.48 on Friday, which dropped the momentum portion of its VTI-volume indicator slightly below the zero line.  However, gold rallied late in the day from extreme oversold conditions, and IF the late day rally can continue into Monday, the signal will turn back to neutral.   The 2-period RSI on GLD remains EXTREMELY oversold at 1.6 with a CCI of 22.2 showing NO Trend.  In other words, GLD should rally. If it does, I’ll be watching for a Buy Signal.  I’d rather be a buyer than a seller of gold now.

Have a great weekend,

That’s what I’m doing.

h

BTW, I’m attaching a chart of Medifast (MED) with this WSR.  I talked about the stock yesterday and wanted to use it as an example of why you shouldn’t trust the recommendations of newsletter writers blindly.  Always, always, always look at the stock with your own eyes.  You know more than the newsletter writer by now. You can spot THT Patterns, Hockey Sticks, and when the DMI turns negative.  Most newsletter writers have no idea about these concepts.  None!

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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.