FREDAlert!
Volume 7, Issue 3
August 21, 2015
Thursday was an interesting day in the markets, kind of frustrating in a way as SPY moved right smack to our target area of 204 and closed slightly below it at 203.97. We received many emails asking if this was a significant break of 204 and the answer is not really, but at the same time we have some remarks. We will discuss some theory first and then give some practical ideas for how to trade this situation we are in.
First: Our targets have not changed. A closing breech of this 204 area implies a test of 198, and then 180 or likely below. We will have more on this at the end of this alert.
Second: The McClellan Oscillator is around -142, not yet at -200. Below – 200 would suggest a kickoff move to the downside.
Third: We thank our friend and colleague Walter Murphy for pointing out that today’s close on the Dow Industrials confirms a Primary Bear Market according to Dow Theory. It was a new low close for 2015. This is another negative data point. We note that the transports are currently above their low by a bit, new lows here would be quite negative as well.
Fourth: Bearish sentiment has been ticking up and Investor’s Intelligence %bears has moved from roughly -15 to -18. To generate a sentiment buy signal we need to see sustained numbers at 25 or above. Several have quoted other sentiment services such as AAII. We do not believe these are reliable, as they have changed their methods for polling over time. Investor’s Intelligence has not changed their methods since the founding of the firm in 1962. Our sentiment indicator (which is less intermediate to long-term than the Merrill Lynch Sell Side Indicator) is still negative and needs roughly 20 weeks of negative action to give a primary buy signal. We will have more on this in the Weekly Review, as well as an update on the breadth indicators that have forecast this current weakness.
Another area of interest is China and the action here has likely contributed to our market’s weakness. In our July 15th update we forecast new closing lows on a weekly basis after the initial thrust to the downside. We mention this because recovery in China could have a favorable impact on our market. We need to close below 74.62 on Friday for this set-up to be complete. Again, we will comment on this in the Weekly Review but want to alert people to this.
We have some ideas on how to trade Friday August 21st, especially for those who want to raise cash. What we would like to see is a down open that sets a low for the day by 10 AM EST. If this low holds and the market can advance from here there may be recovery and a new advance toward the highs. An up open is likely extremely negative and the market should sell down from this up open. Again, exceeding the low of the first half hour would likely be negative. We would raise cash should that occur. But, giving the market sometime after an open tomorrow lessens the chance of a false breakdown and whipsaw, a concern expressed by clients on our call, and in addition helps to keep from overtrading. Realize that indicators such as the breadth indicators we have mentioned over the last few months suggest a correction greater than 10% could occur, and last for longer than most market participants believe. For clients who have clients that are risk adverse, use risk management and raise cash more quickly than usual.
We show charts of the Dow Industrials and Transports, below AND – we will not change or modify these views until after the first half hour or so of trading. We will likely be out in the AM to preclude us from doing so.
