Weekend Strategy Review 9/2/19

Posted by OMS  at September 2nd, 2019

The markets were mixed on Friday as the Dow rallied while technology stocks on the NASDAQ fell.  The Dow finished with a gain of 41 points, closing at 26,403.  It was up 774 points for the week. The NASDAQ was down 11 points on Friday and up 211 points for the week.

For the past few days, I have been talking about an alternate scenario for the Dow that would see it rally to the 26,400 level before moving lower after Labor Day.  The final wave of that scenario, wave ‘c’ of Wave 2 up appeared to be nearing completion on Friday.  Once Wave 2 up completes, the market should resume its downward course from the late-July highs, with prices dropping below the early August lows.

So far, Wave 2 appears to be a simple a-b-c retracement of Wave 1 down. Retracements like this can be viewed as the ‘Blade’ of a large Hockey Stick for Wave 1 down.  The length of Wave 1 down was a little over 2,000 Dow points, so if I subtract 2,000 from yesterday’s high, the Dow should fall to about the 24,500 level as a minimum. Students should remember that Wave 3 down MUST be larger than Wave 1.  It’s usually closer to 1.5 X Wave 1, so the decline could be closer to 3,000 Dow points. Eventually, once all five waves of the pattern are complete, the Dow should be trading at or near the 26 December 2018 low of 21,713.  Students should remember that the rally off the December 2018 low was a five wave Ending Diagonal, and these patterns almost always have a target of where they began….21,700.

The market remains in a very fragile condition.  The fact that Wave 2 up could be nearing completion suggests that a severe decline could begin immediately after the Labor Day Holiday. Protect yourself.

The market timing indicator on the Dow has turned Neutral.  The timing indicators for the NASDAQ, SPX, and Russel 2K remain on Sell Signals.

The Tide has turned Positive while the Dean’s List remains Negative.  Seeing mixed indicators is not unusual during a Wave 2 retracement.

IYT rallied for 0.38 points to 182.49 where it was checked by resistance from the 50-day moving average.  The 2-period RSI on IYT closed with an overbought reading of 87.74 while the CCI showing a reading of -27.4.  In other words, IYT is overbought and NOT in the Trend Mode.  It should begin to pull back early next week and begin to lead the market lower.  The trannies are usually one of the first sectors to begin moving lower as the economy slows.  I still believe the Dow transports could fall from current levels near 10,000 to about 8,300 or lower.

Gold (GLD) dropped 0.37 cents on Friday, closing at 143.73.  Its 2-period RSI closed with an oversold reading of 20.8 with a positive CCI.  So, gold should rally a few points higher next week to complete its Wave 3 up.  If this occurs, the Model will look to take profit on some of its shares of UGL, especially if the market timing signal for gold turns negative.

Bonds (TMF) closed slightly higher of Friday, but the rally appears tired.  The rally off the 1 March low of 18 appears to be a clear five wave structure, with wave 5 up starting on 31 July.  Students should look at a chart of TLT to review the five distinct waves.  The reason this is important is because once Wave 5 up completes, probably near current levels, the next set of waves could be corrective or could produce a trend change.  We won’t know until after the fact.  But the one thing we do know is that in either case, correction or the beginning of a new trend, the next set of moves for Bonds should be down. This means that longer term interest rates will be going up!  And that will put pressure on the equity markets.  Right now, TMF is still at the top of the Dean’s List, so Bonds are way too strong to be shorting. However, given the wave count and the fact that TWM is overbought in a wave 5, students should be watching for a signal change in Bonds and for TBT, the inverse Bond ETF, to appear on the Dean’s List.  It could happen next week.

The Sector Ratio strengthened to 10-14 Negative after yesterday’s session.  The Strong Sector List was led by Semiconductors, Household Products, FoodDrugs, Service and Computers.  The Weak Sector List was led by Real Estate, Energy, Leisure, Autos and Transportation.  

Model Portfolio:  The Model continues to hold 1,200 shares of DXD, 1,000 shares of SQQQ, and 650 shares of UGL (gold).  Available cash is $29,473.  The Model continues to look for high probability entry points and will likely begin to put some of its cash to work next week. Shorting Bonds with TBT is something the Model is considering.

After Friday’s session, the Model is up 28 percent, which translates to an annualized gain of 62.3 percent.

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.

Here’s a chart of the Dow with my best analysis of the wave count for Corrective Wave 2 up. If the wave count is correct, Wave 3 down should begin within a day or so after Labor Day. Be careful and protect yourself

Market Signals for

09-03-2019

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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.