Professor’s Comments September 22, 2020

Posted by OMS  at September 22nd, 2020

The markets gapped lower at yesterday’s open and fell below the ‘neckline’ support of their Head & Shoulders patterns.  At one point, the Dow was down over 920 points, but a late rally pared some of the loss.  The Dow finished with a loss of 510 points at 27,148. The NASDAQ and SPX were down 14 and 38 points, respectively.  The NASDAQ-100 (QQQ) actually finished up 0.64 points which was amazing considering the breadth on the NYSE was 6.2 to 1 negative.  Volume on the Big Board was also negative with 88 percent of the volume being on the down-side. Overall volume on the NYSE was moderate, coming in at 117 percent of its 10-day average. There were 19 new highs and 42 new lows.

Yesterday’s impulsive decline invaded the territory of the previous wave 2 decline, so from a technical perspective, I must rule out the possibility of it being part of a wave 4.  This was the alternate scenario I talked about in my WSR.  So, with the Bullish scenario off the table, my Bearish Scenario has the Dow falling initially to the 25,000level with even lower prices after that.  The Dow would have to trade back above the 27,675 level to negate this Bearish Scenario.

At this point, my targets for the S&P and NASDAQ are not as clear as the target for the Dow, but for now I’m using the 3,000-3,100 level on the S&P and below 10,000 on the NASDAQ Comp. It’s possible the NASDAQ could trade as low as 9,300 on the next wave down.

I remain on Full Red Alert now that ‘neckline’ support in the indexes has been broken.

The Market Timing Indicators for the Major Indexes are now Negative. 

The Dean’s List and Tide remain Negative.  Students should note the short length of the current Dean’s List.

The Sector Ratio weakened slightly on Monday to 19-5 Positive. The fact that the Sector Ratio remains strong is something I’m still watching with concern. On the other hand, I did notice that the composite chart of the Sectors, something I generate, turned negative after yesterday’s session.  This is further evidence that a significant decline is developing. The top five strong sectors were Service, Consumer Products, Transportation, Retail, and Insurance.  I did note that 12 of the strong sectors now have a RS reading of 1 or zero.  With so many sectors with weak RS numbers, another down day could produce a significant change in the Sector Ratio. The top five weak sectors were Semiconductors, Energy, Autos, Computers and Real Estate.

My algorithm continues to remain active. Yesterday, it listed 203 stocks as shorts.  That’s a new high for this leg down.  The previous high was 102 on 8 September.  The previous high before that was 214 on 24 February, and we all remember what happened to the market after that.  Be careful!

There were NO CHANGES to the Model after Monday’s session.  The Model continues to hold trial positions of 1,200 shares of TWM, 1,600 shares of DXD, 400 shares of DUST, 800 shares of QID, and $35,531 in cash.  The Model continues to look for opportunities to buy shares of inverse index ETFs.

Gold (GLD) fell 3.68 on Monday, breaking out of its triangle pattern to the downside.  This unusual move means the triangle was likely the ‘b’ wave of a Bearish a-b-c pattern instead of the more common Bullish triangle usually seen in a Wave 4.  It means that gold could move significantly lower in the days ahead.  My target for the metal is currently near 1,850 which is where wave ‘c’ down of Wave 4 should end.  If 1,850 does not hold, it means that something else is occurring and prices could fall to the next level of support which is near 1,770.  Gold closed at 1,914 yesterday, so prices could continue to head lower for the next few weeks or months.

In my WSR, I talked about how the Dollar appeared to be starting a move higher.  Yesterday, UUP, the ETF for the Dollar, rose 0.18 cents to 25.29.  The chart suggests its next major move will be to the 26 level which is where the 200-day moving average is located.  I’m not a fan of trading the Dollar unless its paired with other currencies, but I do watch it because of its relationship to gold. So, with the Dollar looking like it wants to move up, I’d be cautious of any long gold holdings now. 

BTW, one thing I have been doing lately is using the Connors RS Indicator to identify overbought – oversold conditions.  I used it successfully during yesterday’s decline when the Dow was down over 950 points.  The indicator on the 30 min bars was screaming ‘oversold’, so I took some money off the table.  For the past week or so while waiting for the markets to break down, I have been Position Trading inverse ETFs on the 30 min bars using my Scalp Trading Indicators.  Because the timing signals for the indexes have been mostly negative, I simply watch the volume indicators and buy inverse ETFs when they give say so.  When I’m scalping or Position Trading, I stay in the trades as long as the volume remains negative.  This is my standard exit criteria.  But yesterday, when I saw the Connors RSI at EXTREME oversold levels, I sold about half my shares and bought them back later in the day, saving myself about 350 Dow points.  I have found that this indicator when used on the 30s is extremely good at identifying oversold-overbought conditions.  I use the indicator with the standard settings provided on the ThinkorSwim Platform.  

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

09-22-2020

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