Professor’s Comments Update 2/26/20

Posted by OMS  at February 26th, 2020

There were two major things that happened late yesterday that caused me to do some ‘trial’ buying.

The first was a cluster buy program that occurred just before 3 pm with the Dow trading at the 27,150 level.  Cluster buying from the institutions during a panic decline is usually a Bullish sign. The markets are usually trading higher a month later.

Also, the 2-period RSI on the VIX closed at just under 100 yesterday.  Seeing the VIX at these EXTREME levels is usually a good indication that volatility is near a short-term top and stocks near a short-term bottom. Looking back, just about every time this has occurred, the markets were higher a week later.  In the cases I looked at the average gain was slightly over 2 percent.

BTW, I believe the panic decline that caused the Dow to shed almost 2,000 points in two days is overdone.  The pattern, a Bearish Ending Diagonal, suggested a decline was coming and all the corona virus did was provide the trigger.  But now that Wave 1 down appears complete or nearing completion, the larger pattern suggests that the markets should begin to rally. If I’m correct, the rally should be Wave 2 up and retrace about 50 percent of the decline.  Why do I believe this?  Well, let’s think about what triggered the decline for the past two days and put it into perspective.

The CDC estimates that about 80,000 people are infected by the corona virus.  The worldwide death toll is now about 3,000 people.  Compare this to what happens every year with the common flu. The CDC estimates that last year there were about 19 million cases of the flu in the U.S which hospitalized about 180,000 people and caused 10,000 patients to die.  The WHO reports that every year, the flu can infect 3-5 million people and kill up to 665,000 people.  So, think about it….3,000 people killed by corona vs. 650,000 people killed by the common flu.  Is this enough to cause a decline of 2,000 Dow points in 2-days?  Hmmm?  Don’t panic!  The media is trying to distract you.  Focus on what you know about wave counts, patterns and indicators.   Right now, everything is negative and oversold.  Yesterday, the A-D oscillator came in with an EXTREMELY oversold reading of 285.6.  That’s huge!  That number reflects PANIC!  So, keep your head and watch for opportunities to do some selective trading.  Two weeks ago, the odds were not good to be in the market.  After yesterday’s mauling, the odds have improved significantly.  The way to make money in the market is to stay informed and keep your head when everyone else around you is losing theirs.

One caution about the past 2 days of decline. In my earlier comments I said that Wave 1 down is either complete or nearing completion. After having said this, I must tell you that I can’t be sure of the first part of this statement. That’s because yesterday’s action could have been the completion of wave 3 of Wave 1 down and IF this the case, the Dow could see a small wave 4 rally during the next day or so before wave 5 of 1 down completes below the 27,000 level.

The area to watch today is near 27,400+ on the Dow. If prices begin to move above that level, there is a good possibility that Wave 1 down is complete and Wave 2 up is underway.

For now, all positions being held by the Model are trades only. If the Dow approaches the 27,400 level, the Model will likely take some money off the table. Remember, the market timing indicators are Negative for equities and Positive for gold. So the trades established yesterday are counter trend trades. When we make counter trend trades, we take profits quickly.

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On an administrative note, yesterday was the one-year anniversary for The Model. As of yesterday’s, close, the Model was holding 1000 shares of DUST, 400 shares of DGLG and 400 shares of DDM with a cash balance of 95,487.  The Model was up 29.7 percent for the year.   Because keeping track of the Model’s transactions is a cumbersome job for more than a year, the Model will be closing the books on last year’s transactions and starting with a fresh slate of statistics beginning today. 

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.