Professor’s Comments February 6, 2020

Posted by OMS  at February 6th, 2020

The markets rallied hard again yesterday causing my Market Timing Indicators for the Dow, SPX, and Russell 2K to move to Buy Signals.  The NASDAQ was already on a Buy Signal.

In Tuesday’s update, I talked about how the retracement rally was likely not over, and how the Dow could retrace back to the 28 800+ level before Wave 2 up completes.  We saw this happen yesterday when the Dow gained 483 points to close at 29,291.  The thing that has me concerned about the past three days of rally is that it has been impulsive. Students should understand that while strong rallies can and do occur in a Wave 2, they are usually parts of an a-b-c pattern and not a 5 wave pattern like the one that we’ve seen during the past 3 trading days. So, it’s becoming likely that the decline into the 31 January low of 28,161 was NOT Wave 1 down of a new Bear Market, but rather Wave 4 down of the old Bull.  This means that the current rally is likely part of final Wave 5 up, a wave that could take the Dow to the 30,000 level before it completes.  The fact that the Market Timing Signals have turned positive tends to support this relabeling.

BTW, I talked about the possibility that this alternate scenario could occur in my Comments on 30 January when I said ..if the Bull Market is NOT complete….the decline since the 17 January high of 29,374 is Wave 4 of a five wave sequence of the Bull Market, and that Wave 5 up will likely complete in the late March – April period, probably close to the 30,000 level.  This is the reason the Model is still only holding ‘trial’ positions.

Yesterday, the Dow reached a high of 29,309, so it’s still slightly below the 17 January high.  As long as the Dow stays below 29,373, the Wave 2 retracement scenario remains in play.  A move above 29,373 would blow up the Wave 2 scenario.

The Market Timing Indicators for the Dow, NASDAQ, SPX (SPY) and Russell 2K have moved to Buy Signals. The Dean’s List has turned Positive while The Tide remains Neutral. The DMI’s on the on the Dow and NASDAQ-100 (QQQ) are Positive. 

The Sector Ratio strengthened to 14-10 Positive. The Strong Sector List was led by Household Products, Food, Cap Goods, Computers, and Real Estate. The Weak Sector List was led by Autos, Energy, Service, Food/Drugs and Media.  BTW, one of the things I’m puzzled about is the Sector Ratio. While it has turned positive, it’s still NOT trending.  Also, the top two sectors on the Strong List, Household Products and Food, are NOT sectors that I associate with a raging Bull.  This is almost the same situation that occurred on 30 January when the Sector Ratio was at 15-9 Positive with Household Products (#1) and Food (#3) topping the List. The next day the Dow fell over 600 points.  

Model Portfolio:  Now that the Timing Indicators have turned positive, the Model will be looking to sell its positions in DXD and TZA, especially IF the Dow moves above the 17 January high.  I say ‘looking to sell’ because if you recall, the Model was in a very similar position only last week, when a rally on 30 January caused the Model to exit its ’trial’ short positions. This was the day before the Dow fell over 600 points. Extreme whip lashes like this can and do occur when the market is NOT Trending.

Right now, the Dow is overbought with NO Trend in place. The 2-period RSI is at 90.2 with the VTI at 56.76.  So, while the RSI allows for a bit more rally before becoming EXTREMLY overbought, without a trend in place the overbought conditions will likely cause the market to pullback. This might give us a better exit point. Also, one of the scenarios I have on the Board is that the current rally is part of final Wave ‘C’ up of a rally that began last August.  IF this is the case, the Dow will likely top near the 29,600 level instead of pushing to 30,000.  So, what I’m telling you is that while the odds have shifted toward the Bullish side for now, it’s NOT clear where the current rally leg will end. It could be anywhere between 29,400 to 30,000.  This will make trading problematic in the weeks ahead.  But right now, I’m looking for a place to exit the Model’s inverse positions.

That’s what I’m doing.

h

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.

Market Signals for

02-06-2020

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
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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.