Professor’s Comments January 28, 2020

Posted by OMS  at January 28th, 2020

The markets fell hard yesterday on concern that the Coronavirus in China is spreading. If the virus continues to spread it will impact global trade, which in turn will lower corporate profits and adversely impact the equity markets.

After yesterday’s gap down opening, the Dow finished with a loss of 454 points at 28,535. The NASDAQ and SPX were down 176 and 52 points, respectively.  Volume on the NYSE was moderate, coming in at 105 percent of its 10-day moving average.  There were 111 new highs and 102 new lows.

The Dow, SPY, and Russell 2K have moved to Sell Signals.  The NASDAQ is Neutral.  The Dean’s List is also Neutral, with QQQ still on the List. The Tide is Negative.

Even though the Dow finished above the critical 28,500 level, it’s likely the top is in.  The reason I say this is because yesterday’s decline was impulsive.  It was likely part or all of wave 3 down of a five wave down sequence for Wave 1 down.

If this is the case, the Dow should make a small retracement rally (wave 4 up) during the next day or so, probably back up to the 28,700 level+/-, before retesting yesterday’s low of 28,440.   The re-test should see the Dow move below the 28,440 level, probably close to 28,300.  This would complete a five-wave down Bearish sequence, which would tell me the Bull Market has ended and the Bear Market has begun.  Seeing five waves down and a close below 28,500 are important keys to confirming that the final top is in.

Let’s take a close look at what happened yesterday.  Firstly, all the gain of 2020 was wiped out in one day.  IF the current decline on the Dow completes near the 28,300 level, as I expect, it mans that Wave 1 down will be about 1,070 points.  Now while it’s still too early to project the final target after all five waves of the Major Five Wave sequence are complete. However, if Wave 1 down is over 1,000 points, it’s highly likely that this five wave Bearish sequence will finish somewhere between 21,700 and 23,000.  I won’t be able to refine this target much until after Wave 2 up completes.

Another thing….If Wave 1 down completes near the 28,300 level, we’ll need to start thinking about how we’re going to trade the Model’s ‘trial’ positions.  For starters, I will look to exit the Model’s 300 shares of VXX, the Volatility ETF as this speculative position will only lose money if the Dow bounces in Wave 2 up as I expect. So VXX will be sold on the next move down below 28,500.  Then depending on where Wave 1 down completes, (28,300?) we’ll have to decide on how much of the ‘trial’ inverse positions to keep as the market moves against us in Wave 2 up. I’ll likely want to keep a small position on, just in case I’m wrong and the market continues to move lower.  But the odds are high that the Dow will see a Wave 2 retracement move that could be as much as 500-600 Dow points.  Anyhow, once I see a close below 28,500 AND can count five waves down, I’ll make my decision. I’ll probably look to become aggressive with inverse ETFs on any bounce back above the 28,600 level, with 28,800 being my ideal target level for Wave 2 up. That’s my short-term trading plan for the Model. The larger overall plan is designed to position the Model for a coming Wave 3 decline that could drop the Dow somewhere between 2,500 to 3,000 points from current levels.

The Sector Ratio fell to 13-11 Positive after yesterday’s session.  The Strong Sector List was led by Household Products, Computers, Food, PharmaBio, and Real Estate. The Weak Sector List was led by Energy, Service, Autos, Banks, and Material.  Students should note how Energy, which has been at or near the top of the Weak List for the past few weeks, led the market lower yesterday. Same for Autos (GM got clobbered) and the Banks. 

Model Portfolio:  There were NO CHANGES to the Model after Monday’s session.  The Model continues to hold 400 shares of TZA, 300 shares of VXX, 1,500 shares of DXD, 300 shares of SQQQ and 500 shares of TMF with a cash balance of $57,890.  The Model is up 32.6 percent after yesterday’s session.  The Model remains well positioned to take advantage of the decline that the sentiment, volume, and breadth indicators are predicting.  However, students should look for changes to the Model as Wave 1 down begins to move below the 28,500 level.

One more thing….Yesterday, I received an email from Jeff M. asking about Crude Oil. Apparently Jeff is watching his calendar and noted that the time to trade crude is fast approaching. I don’t want to get into the details of this trade today, but Crude appears to be in the process of forming a bottom for its next move higher within its triangle. All I’m doing now is waiting for a change in signal.

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

01-28-2020

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.