Professor’s Comments January 7, 2020

Posted by OMS  at January 7th, 2020

The Dow fell over 200 points early yesterday and then staged a strong rally into the close.  The Dow finished with a gain of 69 points, closing at 27,703.  The Dow’s early decline tested the lower trend channel of 28,418 level before bouncing.  The NASDQ and SPX were up 51 and 11 points, respectively.  Volume on the NYSE was heavy, coming in at 122 percent of its 10-day moving average.  There were 125 new highs and only 8 new lows.

Yesterdays early decline and late rally was likely part of retracement wave ‘c’ of wave 2 up.  If this is the case, the Dow should begin to decline hard within the next day or so as wave 3 down begins to unfold.  The other possibility is that wave 2 up is not complete and if so, the Dow could make one more small push higher to complete wave 2 up, probably up to the 27,750-28,800 level before falling.  At this point, I’d be watching the short term bars (the 15s or 30s) for my tells.  Any negative turn in the indicators will likely mark the top of wave 2 up.

Yesterday’s late rally was accomplished on weak breadth.  The number of advancing issues was only slightly higher than those declining.  The weak breadth caused the important Hi-Lo indicator to turn negative, making The Tide Neutral. 

In my WSR, I talked about how the 28,428 level would be tested in the days ahead, so yesterday’s early decline came as no surprise.  But now that the area near 28,400 has been tested, we need to pay close attention to any break below this level as it should start a sharp decline to the 27,325 level, the level where the recent wave 5 rally started.

There was a small change in the A-D oscillator of 8 points, so we end to be on the lookout for a Big Move within the next 1-2 days.

There were NO CHANGES to the market timing indicators after yesterday’s session. The Dow, SPY, NASDAQ and Russell 2K remain on Buy Signals.  However, as I mentioned above, yesterday’s weak breadth decline did cause The Tide to turn Neutral.  The Dean’s List remains Positive.

The markets remain at a critical point in their patterns, showing negative divergences and sentiment readings that suggest they could begin to change direction in the days ahead.

The Sector Ratio stayed at 21-3 Positive after yesterday’s session. Students should continue to watch for signs of weakness in the Ratio before becoming aggressive to the shot side. The Strongest Sectors were Energy, Healthcare, Real Estate, Household Products, and Utilities.  The three Weak Sectors were Autos, Transportation and Banking.

Because the Sector Ratio continues to remain strong, I remain reluctant to get aggressive on the short side with the Model Portfolio and only have a few ‘trial’ inverse positions working.  Once the Dow begins to break below its lower trend line, near the 28,400 level, the Model will start becoming aggressive to the short side.  As I mentioned in the WSR, as long as the Dow stays above the 28,400 level, it could still make another push toward its recent highs.  

Late yesterday, the Model bought a ‘trial’ position of 500 shares in TMF, the 20+ year Bond ETF.  Price paid was 27.44 per share.  The Model is looking to take advantage of a potential upside breakout from a four month triangle in Bonds. If the triangle pattern is a wave 4, then Bonds should rally hard as wave 5 up unfolds.

BTW, because the pattern for Bonds has been cloudy during the past few months, I have been reluctant to trade Bonds in my own accounts.  I truly felt that Bonds could go either way from the pattern.  But now that I can count five waves within the triangle, the odds for an upside breakout have increased to the point where I believe a ‘trial’ position is justified.  IF Wave 5 up in Bonds is starting, TMF could trade to the 35-36 level.  

The stop order in SCO was not executed yesterday, even though the price briefly touched the 11.17 level I was using as a mental stop.  I didn’t sell the Model’s shares because the shares of SCO in my personal account were not sold.  SCO finally closed at 11.45, up 0.05 cents.  I will continue to use 11.17 as a stop.

At this point, I’m lukewarm on Crude Oil. In my opinion, the recent spike in Crude Oil was an over-reaction as Iran produces less than half million barrels a day. It’s a drop in the bucket! By comparison, the U.S. Is now producing over 12.5 Million barrels a day with Russia and Saudi Arabia producing about 10 Million each. With this much oil being produced by the Big Three, I don’t see any shortages on the horizon, and if the economy begins to slow as I expect, Crude prices should decline. But that’s a longer term bet. Short-term, anything can happen and Crude prices could continue to spike higher as long as Iran and the U.S. are rattling their sabers. Any disruption or attack on ships passing through the Strait of Hormuz is likely to push Crude prices higher. That’s why I believe a close stop in SCO is warranted.

In addition to the 500 shares of TMF purchased yesterday, the Model continues to hold 1,000 shares of SCO, 1,000 shares of DXD, 300 shares of SQQQ, 500 shares of GDX with a cash balance of $60,447.

The market timing signals for Gold, the Dollar, Bonds, and Crude Oil remain unchanged. It’s likely that there will be several significant changes to these signals once the equity markets top.

Shares of Gold (GLD) made a big move up yesterday, but the move was not shared by the miners.  This is a major concern as gold (the metal) made a new high yesterday. GLD (gold) finished 1.53 points higher at 147.39 and now appears overbought.  With gold (the metal) approaching target highs and the miners NOT responding to the price of the base metal, I need to take precautions with the Model’s shares of GDX by placing a stop at the 29.00 level, one tick below the low of the past two days.

I continue to believe that positions established in inverse index ETFs from current or higher levels on the Dow will prove to be big winners in the months ahead once the current Wave 5 up rally completes. My initial target for the next wave down, after a break of 28,400, is the 27,325 level.  After that, a break of the 26,600 level should lead to further weakness, with a re-test of the December 2018 low of 21,713 possible.

That’s what I’m doing.

h

Market Signals for

01-07-2020

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

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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