Weekend Strategy Review November 12, 2017

Posted by OMS  at November 12th, 2017

The rally in the markets took a breather last week.  The Dow fell 40 points on Friday to 23,422.  It was down 117 points for the week.  The NASDAQ and SPX were also down for the week, losing 13 and 6 points, respectively.  Could the top be in?  It’s possible, but we won’t know for sure until the cockpit indicators turn negative.

As of this weekend, the DMIs on the Dow, NASDAQ, and SPY remain positive.  The DMI on the Dow is just barely positive, falling to 0.26 on Friday. But my combination VTI-volume indicator is still not close to generating a Sell Signal, so it’s likely the markets will likely see some backing and filling before the market finally shows its hand.  Just be patient.  If you look at a chart of the Dow, you will see that the Bollinger Bands are just starting to narrow.  I don’t think we’ll see a Big Move down until the Bands get a lot closer than they are now. Besides the Dow is still way above its 50 and 200 day moving averages.  And before any decline of significance begins, these moving averages, which are important support levels, will need to be broken.

Students might want to look at how IYT, the ETF for the Transportation Index fared just before it topped on 13 October.  On that date, it’s chart showed a similar look to today’s Dow chart.  The Bands were wide on the day the VTI-volume indicator generated a Sell Signal (13 October), but the ETF didn’t start falling immediately. The DMI remained positive until 30 October.  This gave the Bollinger Bands time to narrow, and then once this happened, IYT started to fall.  It closed at 171.12, down almost 9 points from the date the Sell Signal was generated.  During this time, IYT broke through its 50-day moving average and appears on track to test the 200 near 168.  Again, students should look at IYT because it provides us with a good example of how the first wave of a major decline begins. Remember, we’re watching the trannies now because they tend to lead the Dow Industrials. Back in 2007, the Trannies started to decline near the end of July.  The Dow Industrials didn’t start their decline until late October.  So, the Transports were warning that the Industrials were in trouble a full 3 months before the major decline started.  This could happen again.  If it does, it would mean the decline in the Dow won’t likely start until early next year.  But I wouldn’t count on it.  Start preparing for the decline now.

The reason I say this is because the five-wave pattern of the Bull Market since March 2009 appears complete.  If you want to see five picture perfect waves, just take a quick look at the Monthly Chart of IYT.

The Tide remains negative, but the Dean’s List is still mostly positive. TWM, the inverse ETF for the Russell 2K has moved onto the List, making The Tide neutral.  BTW, I’m on a VTI-volume Buy Signal for TWM and currently own several shares.  I like the fact that the ETF is now moving up after a classic Band Squeeze.  Check out the chart and see if you can find the ‘Toothpaste Tube’ being squeezed.

Also note that this week most of the European ETFs dropped off the Dean’s List.  This is something I have been waiting for, because I believe that the European markets will lead world markets lower.  A lot lower.  For example, EWG, the ETF for Germany which has led European markets higher for the past year, is now on a VTI-volume Sell Signal.   My chart for the German DAX, currently near 13,180, suggests it can fall to the 4,000 level during the next 2-3 years.  BTW, most of the European country ETFs I monitor are also on VTI-volume Sell Signals.  These include the ETFs of countries like France (EWQ), Sweden (EWD), Spain (EWP), the United Kingdom (EWU), and Italy (EWI). In other words, most of Europe (I didn’t check all the European ETFs) are now on Sell Signals.  This will make it EXTREMELY difficult for US markets to move significantly higher.  Also, students should realize that while I talked about how the charts are predicting a substantial decline in Germany, the charts for the other European ETFs are showing similar declines, though probably not as much as Germany.  For example, my initial downside target for the London FTSE is the 5,600 level.  This target results from the Ending Diagonal Pattern that started in early 2016.   The FTSE is currently near 7,430.  All the above tells me Europe is in trouble.

Here’s something else to watch closer to home. The country ETF for Canada, EWC, is still on The Dean’s List.  Same for Australia (EWA), although Australia is not that close.  These markets tend to perform very similar to U.S. markets, although each depends on the export of raw materials more than the U.S.   Here’s the thing:  If world economies start to slow, these ETFs should start to fall off the Dean’s List, just like the transports did in the U.S.   So, watch EWC and EWA.  BTW, my targets for these ETFs are also near their early 2016 lows, based on similar Ending Diagonal Patterns.  EWC, currently near 23, could see 15.  EWA near 29, could see 18….in the next 2 years.  That’s what the charts suggest can happen.  And that’s why I’m paying attention to any Sell Signals that are generated.  

Friday’s Sector Ratio continued to decrease.  It now stands at 10-14 negative. The Strong Sectors were led by Energy, Semis, Cap Equipment, Real Estate, and Computers.  The Weak Sectors were led by Consumer Products, Telecoms, Household Products, Service, and Foods.  Continue to stay in stocks and ETFs in the strong sectors and avoid or short those in the weak sectors.  Continue to watch the Sector Ratio closely. 

Bottom Line:  The markets are in the final wave of a large Ending Diagonal Pattern that continues to suggest a major top is near.  Some sectors of the market are already starting to roll over, as evidenced by the negative Sector Ratio.  The Sector Ratio turned positive on 6 September.  Now its negative.  Europe is on Sell Signals and has started to roll over.  The P/E ratios on U.S. stocks are at historic highs.  Some of these ratios are at ridiculously high levels.  The Tide, with its A-D oscillator, is negative, meaning most stocks are starting to move down. The indexes continue to be propped up by a handful of high priced technology stocks. The current rally in the indexes could end at any time.  Be extremely careful now and into years end.

Have a great weekend.

That’s what I’m doing,

h

P.S. There was another small change in the A0-D oscillator on Friday, so we need to be on the lookout for another Big Move early next week.

Market Signals for

11-13-2017

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