Professor’s Comments July 7, 2020

Posted by OMS  at July 7th, 2020

The markets staged a strong rally yesterday on relatively light volume. The Dow finished with gain of 460 points, closing at 26,298.  The NASDAQ and SPX were up 226 and 50 points, respectively.  Volume on the NYSE came in at 94 percent of its 10-day average.  There were 96 new highs and only 3 new lows.

The markets continue to work on retracement Wave 2 up within Major Wave 3 down.  After a strong opening, the Dow continued to move higher, exceeding gap resistance at the 26,128 level. I warned about the possibility of this happening last week and talked about the 26,500+ level as a possible target.  Yesterday’s rally carried to a high of 26,298. 

So, what happens now?

Well, there are two likely possibilities.  The Dow could still rally another 200+ points higher to complete Wave 2 up.  Or not.  The reason I say this is because of what happened with yesterday’s Sector Ratio. While the Dow was rising 460 points, the Sector Ratio weakened to 12-12 Neutral.  Think about this…going into last Thursday’s session, the Ratio was 24-0 positive, telling us to expect a strong rally.  Then after Thursday’s 92 point gain, the Ratio fell to 14-10 Positive.  Hmmm?  Tack on another 460 points yesterday and the Ratio is now down to a neutral 12-12.  By falling in a rising market, the Sector Ratio is telling us that while the Dow appears strong on the surface…the overall market is not.  It’s starting to weaken.

The overall pattern appears to be either a simple a-b-c pattern or a flat.  If it’s a simple a-b-c, all waves have been completed.  If it’s a flat, it means that the Dow should decline a few hundred points today and then stage one more rally toward the 26,500 level to complete five waves of wave ‘c’ of the pattern.  What I’m telling you is that with either pattern, the Dow should be close to completing its Wave 2 up. Once Wave 2 up completes, it should begin to break below the H&S neckline near the 25,000 level and send stocks reeling.  My target for the next leg down, Wave 3 of Major 3 down, remains below the 23,000 level with even lower prices possible. 

The VTI remains neutral at 58.7 with a 2-period RSI at 92.3.  So, with no trend and an extremely overbought RSI, the market should decline today.  What happens after the decline…another rally to 26,500 or a break of 25,000 remains to be seen?  Wave 2s are NOT predictable. The only thing you know is that they will retrace in some type of a-b-c pattern which this Wave 2 has done.  

One of the things students should be watching for now is impulsive action. If the next decline starts to fall hard with only minor retracements, there’s a good chance that Wave 3 down of Major Wave 3 down is underway.  

The Market Timing Indicators for the Major Indexes are Positive after Monday’s session.

The Dean’s List is Positive, and The Tide remains Neutral.

As I mentioned above, the Sector Ratio weakened 12-12 Neutral after Monday’s session.  The top 5 Strongest Sectors were Material, Cap Goods, Computers, Household Products and Retail.  The top five Weak Sectors were Banks, Leisure, Service, Telecoms, and Food.

The Model continues to hold 1,600 shares of DXD, 400 shares of DUST, and a lot of cash.  It continues to look for opportunities to buy shares of inverse index ETFs.  The Model will become aggressively negative if the Dow falls below the 25,000 level. 

Small cap stocks on the Russell 2K have been a lot weaker than their large cap brothers on the Dow.  One of the things I’m watching now is IWM, one of the positive ETFs for the RUT.  IWM closed at 142.43 yesterday.  If it begins to break down, the pattern suggests a straight down move toward the 90 level.  That’s why I’m looking to add a few shares of TWM, the ETF for the inverse Russell, to the Model. The VTI on IWM is at 60.7 (NO TREND) with an over bought 2-period RSI at 79.2.  It should begin its pull back today.

Not much changed with the miners after yesterday’s session.  It still appears that mining stocks are close to completing wave ‘b’ of a complex Wave 2 pattern that still needs one more leg down to go.  It’s still not clear if the miners are going to follow gold higher or make one more run lower, toward the 220-240 level on the HUI.  It should be interesting to see what the miners do today given their overbought conditions.  A break on 260 would be negative for the miners.

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

07-07-2020

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.