Weekend Strategy Review April 16, 2017

Posted by OMS  at April 16th, 2017

The Dow fell 139 points on Thursday, closing at 20,453.  It was down 203 points for the week.  The NASDAQ finished down 31 points on Friday and down 73 points for the week. 

During the week, I had two emails asking about why I wasn’t talking about my Sector Rotation Strategy during the current market decline.

The Sector Rotation Strategy works best when the market is trending and a few strong sectors are leading the way. This is not the case now.  Even though the overall market has been moving down, there are still more strong than weak sectors. This tells me NOT to get too comfortable with the short side. However with the VTI on the Dow continuing to move down, I do pay attention to the weak sector report when I look to scalp short individual stocks or sell option premium. For example, with Energy leading the Weak Sector Report and DUG on the Dean’s List, its telling me that energy stocks are likely not going anywhere anytime soon. So IF if I owned an energy stock, seeing Energy appear on the Weak List is when I’d start thinking about selling a few covered calls to collect option premium. By doing this, I’d get paid a few bucks while I’m waiting for the market to turn. Anyhow…..

Right now, it appears that the market has finished corrective wave ’b’ up and has started wave ‘c’ down of Major Wave ‘D’ down.  Thursday’s VTI reading on the Dow was 33.2, so it’s still NOT in the Trend Mode.

With NO Trend in place, you must trade differently.  You can either scalp trade or Position Trade, picking an entry point and then taking profits when the market reaches a certain level.  Traders win in corrective markets; buy and hold investors face a tough road. All the down-up-down-up movements of the corrective a-b-c waves chews them to pieces. That’s why I have been talking about shorting the market from DOW 20,800 by buying a few inverse index ETFs like DXD and TWM. 

So when the Dow got close to its low of 20,453 yesterday, I sold most of these inverse positions and will now look to re-establish them on the next bounce.  The 20,450 level was the target for the H&S Pattern I talked about last week.

BTW, with all the choppy trading taking place, I still don’t see any point in shorting the individual sectors.  This is why I’m just trading a few inverse index ETFs.

Thursday’s Sector Report was little changed.  The report had 15 strong sectors and 9 weak.  The Utilities, Semiconductors, and Leisure continue to lead, with Energy, Service, and Autos lagging. 

One of the reasons I continue to expect more choppy trading in the days ahead is The Professor algorithm.  Since the market started its decline in early March, the Professor never highlighted the number of shorts required to signal the start of a major down trend.  Even yesterday, with the market down 139 points, he only highlighted 5 stocks as shorts.  This is NOT how major down trends start!  It’s one of the reasons that I believe that the current decline is only part of Major Wave ‘D’ down of the large Ending Diagonal Pattern that started in February 2016.  And IF this decline is only Wave ‘D’ down, then the market needs one more rally leg (Major Wave ‘E’ up) to complete the Ending Diagonal Pattern later this summer. 

OK, so where are we? With the Dow having reached the target (20,450) projected by the small Head & Shoulders Pattern, that pattern is complete. Now, a new pattern needs to form before the market can move lower.

The larger Ending Diagonal Pattern still suggests that Major Wave ‘D’ down will complete near or below the 20,000 level. But before the Dow can do this, it will probably need to ‘bounce’ so the ‘Blade’ of a small inverse Hockey Stick Pattern can form. Given that the market is now EXTREMELY oversold with no trend, it’s likely the bounce will occur next week.

If this ‘bounce’ happens, I’ll look to re-establish my short positions using inverse index ETFs at slightly higher levels. I’ll wait for the 2-period RSI to become overbought.

Gold is another story.  It’s in an Up Trend.  On Thursday, President Trump commented that the U.S. dollar was too strong. That caused the dollar to drop, pushing gold higher. A strong Dollar is NOT something the President wants to see. It pushes interest rates higher and slows the economy.

GLD rose 0.58 points after the President’s comments, closing at 122.60.  The 2-period RSI is finished with an overbought reading of 99, but that’s OK given that the VTI is at 83.3 which means GLD is trending.  As long as the VTI stays in the Trend Mode, I keep my finger off the Sell Button. 

When a stock or ETF, like GLD enters the Trend Mode, instead of looking to sell, I’m always looking to ADD to my positions.  The way I do this is with Rifle Trades.  So, this week, IF the Dow rallies, there is a good chance that gold will pull back slightly.  If it does, keep your eye on the 2-period RSI.  If it drops below 30, that’s when I’ll look to do some mining.

Remember, my target for GLD on this run is the 135+ level.   But even though gold is in a wave 3 Up Trend, it will NOT go straight up. There will be pullbacks along the way. I view these pullbacks as opportunities to add shares to my Basic Position or make Rifle Trades.  As long as GLD remains in its Up Trend, I simply watch the 2-period RSI to identify temporary oversold conditions.  This is where I buy half my basic position. I buy these additional shares when the 2-period RSI becomes oversold and sell them (eat the cake) when the RSI becomes overbought.

BTW, students should note that UDN, the inverse ETF for the Dollar, is back on the Dean’s List. This is always a welcome sign for gold traders.

Have a great Easter Weekend.

That’s what I’m doing.

h

Market Signals for

04-18-2017

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