Professor’s Comments December 15, 2020
Posted by OMS at December 15th, 2020
The market rallied as expected early Monday with the Dow reaching the target level I mentioned in the WRS. The S&P and the NASDAQ did not make new highs yesterday, creating an inter-market divergence. Once the new high on the Dow was in, the markets began a rapid fall off. The Dow finished the day with a loss of 185 points, closing at 29,862. Technology stocks on the NASDAQ were stronger than the Dow yesterday, closing 62 points higher. I do not expect this strength in technology to continue, as a stock like Tesla (TSLA) appears to have reached its high four days ago and is now in wave 2 retracement pattern. (BTW, students who own stocks like TSLA, should check out its CCI. The daily indicator is telling me the Up-Trend is close to being over). I don’t want to spend a lot of time on TSLA this morning and get too far off track, but students should note the clear five wave pattern on the stock since its March low. Right now, the daily indicators are still positive on TSLA, but clearly this is NOT a place where I would want to be once the ST indicators turn negative.) The SPX was down 16 points. Volume on the NYSE was moderate, coming in at 94 percent of its 10-day average. There were 221 new highs and only 2 new lows.
Yesterday’s rapid decline on the Dow after reaching a new target high means that Wave 5 up of the Ending Diagonal Pattern may have completed yesterday. If this is the case, the Dow should start to decline to where the pattern began, which is the 12 November low of 28,902. After yesterday’s large intraday decline, a small retracement rally is likely, but the rally should not exceed yesterday’s high. The rally should form the ‘Blade’ of a Hockey Stick Pattern, enabling us to project the magnitude of the next leg down. Yesterday’s intraday decline was just over 400 points (the ‘Stick), so depending on how high the retracement rally reaches, the decline from that high should be at least 400 to 600 points lower. A decline of this magnitude will likely cause the Dow to fall below the 29,600 level which would eliminate any remaining Bullish scenarios.
Because of this, I remain on Red Alert.
Yesterday’s decline caused the volume indicator on the Dow to turn negative, so the Market Timing Indicator for that index is now Neutral. The Market Timing Indicator on the NASDAQ remains Positive.
The Dean’s List remains positive, but The Tide has turned Neutral.
The Sector Ratio remains strong at 22-2 Positive. The top 5 strong sectors were Semiconductors, Energy, Media, Materials and Technology. The two weak sectors were Leisure and Utilities.
Energy stocks led the market higher during yesterday’s early rally, but then reversed once the target high was achieved. A stock like NBR, which reached a high of 76.76 yesterday, pulled back over 3 points during the afternoon sell off. Like I always say, no stock, no matter how good goes to heaven. The CCI on NBR remains in the Trend Mode, but the clear divergence tells me the trend is weakening. Other top energy stocks from the MWL, like Devon Energy (DVN) also rallied early but closed lower. The lower close on DVN caused its CCI to move out of the Trend Mode, which told me it was time to pull the plug. Like I said in the WSR, an important part of the Professor’s Methodology is learning how to protect profits that you made during a rally phase. I made a nice profit since getting in these top stocks in late November, so when I saw the CCI move out of the Trend Zone (below +100), it was time to protect that profit.
Another reason I started to take profits in energy yesterday was because large speculators are now at the highest levels they have been in months. These are the guys who manage hedge funds. They are trend followers who increase their positions as the trend rises. Right now, they have increased their net long positions in futures and options contracts to near record levels. They are usually wrong! The guys that are usually right are the commercial hedgers who take the opposite side of the trade. I always like to bet with them. The commercial traders in commodities are now at their lowest level of open interest in over 10 years!!! From a pattern perspective, commodities also appear to be in the final wave of an Ending Diagonal or Rising Wedge Pattern. So, commodities appear to be in the same boat with the Dow. The pattern suggests a decline of about 10 percent.
What I’m doing: Once the Dow reached its target high yesterday, I started to prune back my energy stocks. I also added to my short positions in gold and silver. As most of you know, gold and silver shares have been at the top of the Weak List. Six of the top seven stocks on that List are gold or silver related. Yesterday’s decline saw GDX fall from an intraday high of 35.35 to 34.26, a nice one point + trading gain. Other top gold stocks from the Weak List, like AU and PAAS saw similar declines. So once again, just like being in strength during a rising market, the Lists told me where to be once the market started to decline. If the market rallies today as I expect, I will look to add to my short positions in the metals and mining stocks.
Yesterday’s Weak List showed PAAS, AU, WPM, ABX, RGLD and GDX as the leaders.
Model Update: The Model is 100 percent in cash.
The Model Portfolio is being shown for educational purposed only. The Buy/Sell actions in the Model Portfolio are made based on technical indicators that can and do change frequently and should NOT be considered as recommendations for trading an actual portfolio. Any gain or loss in the Model Portfolio should not be used to predict future performance of the Model.
That’s what I’m doing,
h
Market Signals for
12-15-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | NEU | 14 Dec 2020 |
NASDAQ | POS | 23 Nov 2020 |
GOLD | NEG | 09 Dec 2020 |
U.S. DOLLAR | NEG | 07 Dec 2020 |
BONDS | NEG | 09 Dec 2020 |
CRUDE OIL | POS | 11 Nov 2020 |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
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.
Category: Professor's Comments