Weekend Strategy Review November 19, 2017

Posted by OMS  at November 19th, 2017

The markets fell hard on Friday.  The Dow dropped 100 points, giving back about half of Thursday’s gains.  It was down 64 points for the week, closing at 23,358.   The NASDAQ and SPX were also down on Friday, losing 11 and 7 points, respectively. The NASDAQ was up 32 points for the week, the SPX had a relatively flat week, down 3 points.

Friday’s trading appeared to be wave ‘d’ down in the Ending Diagonal or Wedge Pattern I talked about on Friday.  If this is the case, the markets should make one more rally for Wave ‘e’ up before topping. This could occur early next week and complete just after the Thanksgiving Holiday.  

BTW, the markets will have a shortened schedule next week, with most traders leaving at 1pm on Wednesday before returning on Friday. Because of this, I will be going to a Holiday/Vacation schedule, posting Comments on Tuesday, a brief report on Thursday, and the WSR next Saturday.

Not much changed with the indicators after Friday’s session.  They’re still mixed. However, the Dean’s List did turn positive, which was strange to see after a big down trading session.  This is one of the reasons I’m still thinking the markets have one more rally left in them.

Friday marked the fifth week in a row that my indicators are giving mixed to bearish signals.  Eventually, the exuberance over the tax-reform bill should start to wear off, as investors start to realize just what the tax bill means to small businesses and individuals.  That’s if it gets passed.  If it doesn’t, it would be a big negative for the market and we could see a serious decline begin.

Stocks have become EXTREMELY overvalued.  Traders are ignoring the fact that the Shiller P/E ratio is at historic highs.  After Friday’s close, the ratio stood at 31.51, the second highest level ever recorded.  This level was only exceeded one time, just before the market crashed in 2000.  Traders are betting that the proposed tax cuts will boost future earnings, which would lower the outrageously high P/E ratios.  That’s a very risky bet!

Meanwhile the market continues to be pushed higher by a relatively few stocks.  We know this because The Tide, which measures the overall breadth of the market, remains negative.  The A-D oscillator is also negative, which means that most stocks on the NYSE are already starting to move down.

The Sector Ratio, which has been spot on for us, remains positive.  As of Friday, the ratio remained unchanged at 14-10 positive.  As long as this ratio stays positive, the markets should maintain a positive bid.

Friday’s Strong Sector List was led by the Semis, Leisure, Real Estate, Energy and Banks.  The Weak Sectors were led by Service, Household Products, Telecoms, Retail, and Food.  Continue to stay in stocks and ETFs in the strong sectors and avoid or short those in the weak sectors.  Continue to watch for changes in the Sector Ratio.  With the Sector Ratio maintaining its positive bias, the markets will likely continue to form their topping patterns (Ending Diagonal) into early December.  But once we get past the Thanksgiving Holiday, please pay attention to any negative change in the ratio.

Also continue to watch the European markets as we move forward, especially the larger markets like Germany and France. If you’ve been watching, all European ETFs have moved off the Dean’s List.  The German DAX is in the final stages of forming a major topping pattern that suggests lower prices for years to come.  After topping at 33.5. EWG, the ETF for Germany generated a Sell Signal on my VTI-volume indictor and fell to support at its 50-day moving average.  For the past week, EWG has traded along this moving average, as the ‘Blade’ develops.  Once this ‘Blade’ completes, students should watch for EWG to break below the 50 and start to move lower. A break of the 50 will likely start a major decline in European markets, which will also be felt here in the U.S.  BTW, the same Hockey Stick pattern that currently exists in EWG, is also present on the other European ETFs, so if one starts to break down, all the others will be impacted.

During the week, shares of EWA, the ETF for Australia, also moved below their 50-day moving average.  My VTI-volume indicator is negative for EWA, which is troubling for gold and the metals.  Australia is a mineral rich country, and derives a lot of its income from the export of these items.  My indictors on gold and the miners are still mixed, but IF they start to turn negative, with EWA being negative, we could see significantly lower gold prices.  I’m still avoiding gold for now. BTW, the VTI-volume indicator for EWC, the ETF for Canada, another mineral rich country, is also negative.  The HS pattern on EWC is similar to that on most European country ETFs, so watch the 50 on that one too.   

Again, the reason I’m watching the foreign markets now is because of the long-term chart patterns I see developing.  In last week’s WSR, I mentioned a few of the targets.  For example, the DAX which is near 13,000, could fall to 4,000 or below.  The pattern suggests this could happen within the next 2-3 years.  This is why we need to pay attention to the indicators now, especially if they start to turn negative.  Remember, they don’t ring a bell on Wall Street to tell you a major decline is coming. You must pay attention to the indicators for that.  Right now, the indicators are mixed.  This is their way of warning you about the markets.  When they turn negative, they’re screaming Sell.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

11-20-2017

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