Professor’s Comments June 25, 2020

Posted by professor  at June 25th, 2020

The market plunged yesterday on moderate volume. The Dow finished with loss of 710 points, closing at 25,446.  The NASDAQ and SPX were down 222 and 80 points, respectively.  Volume on the NYSE came in at 99 percent of its 10-day average.  There were 15 new highs and 12 new lows.  The increase in new lows turned the Hi-Lo indicator negative, making our combination breadth indicator, The Tide, negative.   It’s been over three months since The Tide has been negative.

Yesterday’s decline was the Big Move predicted by Tuesday’s small change in the A-D oscillator.  Because it was impulsive, it’s possible that the move was the start of Wave 3 down, a major crash wave within Wave C down of the Bear Market.  However, we still don’t know this yet. That’s because the market timing signals for the Dow and NASDAQ are still mixed, and as long as the Dow remains above its 15 June low of 24,843, there’s still a possibility that the Dow could still rally back to the 26,700 level to complete Wave 2 up.  Yeah, I know that 24,843 is still almost 600 points from current levels, but that’s one of the ways you tell if corrective waves are complete. Anyone who tells you otherwise doesn’t really understand technical analysis.  You MUST see the market make a lower low, and right now that hasn’t happened yet.  It will one the Dow breaks below 24,843.

On the other hand, there are a few other clues that are telling us Wave 2 up has completed and Wave 3 down is underway.  The first is the Market Timing Indicator for the Dow, which has turned negative generating a Sell Signal.  The second is The Tide which I mentioned above.  Joining these are the Sentiment and yesterday’s BIB CHANGE in the Sector Ratio.  First, let’s talk about sentiment.

Yesterday’s IIA survey of investment advisors was the highest since the week of February 12-18 just before stocks crashed. The reading showed Bullish Advisors at 57.3 percent, the highest since level since 21 January.  Now a high percent of Bullish Advisors is not unusual by itself, because these guys tend to remain bullish.  But when you see the percent of Advisors rising when the markets are falling…well, that’s worth paying attention to.

Also, students MUST understand where they are.  It’s not like we don’t have other signs. Remember, yesterday’s decline followed Tuesday’s gap open, so from a technical perspective, the markets made an “Island Reversal” pattern yesterday.  These candlestick patterns are almost always found at major turning points…. like the completion of a Wave 2.  So, there’s that too.

But the thing that really got my attention was the Sector Ratio.  It fell to 12-12 Neutral after yesterday’s session. If you have been following the Ratio, you know that it was one of the first indicators to signal the start of the Wave 2 corrective rally.  The Ratio stayed heavily positive since the rally began, supporting the rally.  So, by turning 12-12 neutral after yesterday’s session, at the very least, we need to pay attention.

The combination of all the above was enough for the Model to establish a ‘trial’ position in DXDs.  I believe the odds are above average that Wave 3 down has started, so I want something sort or inverse on. But it’s still early.

The Market Timing Indicators for the Major Indexes are mixed with the Dow Negative and the NASDAQ still Positive.

The Dean’s List is Neutral while the Tide has turned Negative.

Again, the Sector Ratio has turned 12-12 Neutral.  The top 5 strongest Sectors were Household Products, Cap Goods, Materials, Computers and Retail.  The List is telling us that consumers are staying home, buying toothpaste and toilet paper, and ordering things for their homes online.  Hmm, seems a lot like what I’ve been doing.  The Weak Sector List was led by Telecoms, Banks, Food, Insurance, and PharmaBio. If the market begins to head down, I would expect these weak sectors to lead the way.

With yesterday’s purchase, the Model currently holds 800 shares of DXD, the 2X inverse ETF for the Dow (DIA), 400 shares of DUST and a lot of cash.  It continues to look for opportunities to buy shares of inverse index ETFs.  These purchases could begin within the next few days, but I’d really like to see the NASDAQ (QQQ) generate a sell signal.

Gold and the miners fell slightly yesterday.  GLD dropped 0.58 cents to 165.9.  It’s possible that gold had broken out of its Bullish flag pattern and is about to rally to the 1,900 level as Wave 3 up unfolds.  The miners are a different story.  In recent Bear Markets, the miners have had tendency to follow stocks down as gold rallied.  So, the current pattern on he short -term bars needs to be watched.  As I mentioned in yesterday’s update, the HUI has developed two small H&S Patterns that if broken should send prices significantly lower.  The levels to watch for a break are 272 and then 258-260.  Both levels form the neckline of small H&S patterns that IF broken, should send prices significantly lower.

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.

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.