Professor’s Comments October 29, 2020
Posted by OMS at October 29th, 2020
The markets fell hard yesterday on heavy volume and breadth. The Tick was massively negative again, with two of the last three sessions recording a closing reading over -1,000! That’s an incredibly negative number and usually marks some type of short-term bottom in the market.
The Dow finished the day down 943 points, closing at 26,519. Remember this number? It was the target number I mentioned last week for the Ending Diagonal pattern on the Dow. Well, we’re there now. Once the Dow broke key support at the 27,775 level, it was clear that the September low would be tested.
The NASDAQ and S&P were down 426 and 119 points, respectively. Volume on the NYSE was heavy, coming in at 123 percent of its 10-day average. There were 14 new highs and 98 new lows.
Wednesday’s decline was another 90 percent down volume day. It was the second such day in the past three sessions. There were 10 stocks down for every one that was up on the NYSE with 91 percent of the volume occurring on the downside. The TRIN finished the day at 0.68, which tells me that even though the past three days have been washout days in terms of breadth and volume, there doesn’t appear to be any panic…yet. Also, my custom VTI has NOT yest entered the down Trend Mode.
So, given that we have negative indicators on the cockpit and an EXTREMELY oversold market with no panic, and NO TREND, here’s what I think will happen……
Today, the markets will likely see a small rebound rally. The rally or at least some sideways trading, will likely last into the election. It’s what happens AFTER election day that will determine the next major direction in the markets. Once the Dow broke 27,775, it was easy to see that the markets were headed lower. But now that we’re at the September low, there are two possible scenarios going forward:
The first scenario, my primary scenario, has the Dow rallying hard after the election. This scenario suggests that the recent decline was the completion of Wave B down in a complex zig-zag pattern on the Dow. The reason I lean toward this scenario is because the decline into the September low was three waves, not five as one would expect if it was the primary trend. If this is the case, stocks should rally hard in Wave C up to complete Major Wave B up once the uncertainty of the election passes. The major concern I have with this scenario has to do with the impulsive nature of the decline that has occurred during the past few sessions. Impulsive declines are usually not seen in corrective waves, but they can and do occur. If the decline is Wave B down, it MUST stop at current levels.
If it doesn’t, it means that the markets are in the middle wave of Wave 3 down. Under this scenario, the Dow will likely continue to decline with the next stop being a test of the 24,850 to 25,000 level, with even lower prices likely. So, its EXTREMELY important that the markets hold their bid into the election to give my primary scenario a chance. If they don’t, a break below current levels would almost assure that the current decline is not over.
The Market Timing Indicators for the Major Indexes are Negative.
The Dean’s List and The Tide are Negative.
The Daily Scalp Trading Indicators on the Dow (DIA) and QQQ are Negative. The same indicators have turned Negative on Apple (AAPL). So now we have a condition where my Scalp Trading Indicators are all Negative. You can see why I’m not comfortable with my primary scenario. Clearly this will have to change IF the markets are going to rally after the election.
Further, the Sector Ratio weakened to 4-20 Negative after yesterday’s session. The top four strong sectors were Autos, Retail, Transportation and Utilities. The top five weak sectors were Energy, Media, FoodDrugs, Computers and Technology.
There were NO Changes to the Model after yesterday’s session. The Model remains mostly in cash with a small portion of its portfolio (about 20 percent) in gold. The Model sold its long position in the Q’s on 12 and 14 October at 295.70 and 293.24. Yesterday the Q’s closed at 271.64. The Model will look to re-enter the Q’s when the Scalp Trading Indicators turn positive. Right now, there is NO Divergence in the indicators which would suggest a re-entry anytime soon. Be patient and continue to protect yourself.
That’s what I’m doing.
h
BTW, the ST indicators on gold turned negative after yesterday’s session. This suggests that gold (the metal) has NOT finished its Wave 4 down and may need another decline to complete its bearish corrective pattern. Given that the metal could trade down to the 1,762 level (its currently at 1,876) that’s too far down to be holding GLD in the Model. So IF gold pops today, the Model will exit its position in GLD and move to the sidelines. After seeing what happened to the Q’s after the ST Indicators turned negative, the Model does not want to hold anything with negative indicators. I still believe that once Wave 4 down in gold (and silver) completes, both metals will see explosive rallies in the months ahead. But not just now.
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.
After writing today’s comments, it occurred to me that the two scenarios I talked about could be related to who wins the next election. Is the market telling us something the polls are not?
Right now, most polls have Joe Biden in the lead. But President Trump continues to remind supporters that the polls were wrong in 2016 when they predicted Hillary Clinton would be the next President.
Obviously, that did not happen. Instead, once the results were in, the market went on a tare, gaining 960 points during the week of the election. The Dow was almost 10,000 points higher after President Trump’s first year in office! While I don’t see any post election rally moving this high ever again, it could happen if a vaccine for Covid19 is developed and the economy gets back on its pre-virus growth path.
On the other hand, if the Democrats take over the White House, Senate, and House, the doomsday scenario that many of the pundits talk about could happen given the current technical patterns. These patterns suggest a real present danger for the markets, especially if current levels are broken to the downside. If you recall, one of the scenarios I talked about for the markets earlier this year showed a scenario that had the Dow declining to the 12,000 level or below during the next 4-5 years. That scenario is just as alive today as it was when I first wrote about it. Nothing has changed.
In this scenario, I said that the Dow would crash to the 18,000 level and then rally back to the 26,000 level before falling again. I was wrong on the amount of rally as the Dow got back to within 467 points of its previous high of 29,568 before falling again. From a technical perspective, the rally didn’t change one thing. A rally back to near a previous high, though unusual, is perfectly acceptable. As long as the rally did not exceed 29,568, it still MUST be considered a retracement wave in a Bear Market.
So as we approach next Tuesday’s election, I want my students to fully understand where the markets are in the current wave cycle. A Republican win would likely mean that the Bull Market is NOT over. From a technical perspective, it would mean that the February crash was Major Wave 4 down within a major Bull Market. If this is the case, the odds would be high that the Dow would exceed the old highs pushing well above the 30,000 level in the months ahead as Wave 5 up continues to unfold. In this scenario, the current decline is only minor wave 4, with a wave 5 of Wave 5 rally yet to come.
On the other hand, IF the current levels are broken, the pattern seems to suggest a major change in the economy and the markets is underway. In my opinion, this can only be caused by a major change to the current political situation in our country. If the politicians go back to the regulations of the past, end fracking, etc, the doomsday scenario that I outlined several months ago could easily begin to unfold. It’s right there in the cards (the patterns).
At this point, it appears that both scenarios have equal probabilities, but with mixed indicators on the cockpit, I cannot ignore the doomsday scenario. To do so would be foolish.
I just want my students to understand that elections do have consequences, and one of them might be a significant impact to the equities markets.
Please be careful with your portfolio as Election Day approaches.
That’s what I’m doing,
h
Market Signals for
10-29-2020
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 23 Oct 2020 |
NASDAQ | NEG | 23 Oct 2020 |
GOLD | NEG | 26 Oct 2020 |
U.S. DOLLAR | NEG | 09 Oct 2020 |
BONDS | NEU | 27 Oct 2020 |
CRUDE OIL | NEG | 27 Oct 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.
Category: Professor's Comments