Weekend Strategy Review August 23, 2020
Posted by OMS at August 23rd, 2020
The markets staged another rally on Friday on extremely weak breadth. The Dow finished with a gain of 191 points, closing at 27,930. Most of the Dow’s gain was due to one stock…Apple, which contributed 167 points to the indexes 191 point gain. Apple, with a P/E of 37, is now almost as large, in terms of market cap, as the combined total of the 2,000 stocks that make up the Russell 2K (approximately $2.2 Trillion). Students should understand that this is ‘mania’ territory for Apple. However, as I mentioned in Thursday’s Comments, the hourly Scalp Trading Indicators on Apple remain positive, so until they reverse and turn negative, the ‘mania’ could continue. Watch the hourly bars. BTW, the same ‘mania’ conditions occurred in gold two weeks ago as the metal approached its top. Once the hourly indicators on GLD turned negative, the ETF started to decline and is now down over 10 points.
Friday’s rally in the Dow reached a high of 27,930, which is still shy of the 11 August high of 28,155. By not moving below 27,624 yesterday, it’s likely that the Dow is still tracing out wave 5 up of its 5 wave pattern for Wave 2 up. Like I said in Thursday’s comments, as long as the Dow remains above 27,624, the large cap index could test the 28,000 level with 28,200 possible. However, after examining yesterday’s weak breadth session, where only 15 Dow stocks moved higher while 15 declined, I’m not sure if the Dow has enough energy to move above the 11 August high of 28,155. In other words, the Dow might have already topped. Students should continue to watch the 27,624 level next week as a close below this level would tend to confirm that Major Wave 3 down is underway.
BTW, on Monday, students should also keep an eye on the Dow’s 12 August high of 28,043. If this level is exceeded, the odds are high that the 28,155 level will be tested. If this small rally happens, the odds are high that Major Wave 3 down will start immediately after the retest. A break below 27,624 on the Dow would cause me to go to Full Red Alert on that index.
The Market Timing Indicators for the Major Indexes are Positive.
The Dean’s List remains Positive while The Tide remains Neutral. Three out of the four breadth indicators that make up The Tide remain negative with the Up-Down oscillator being the lone positive holdout. BTW, the important A-D oscillator continues to decline and now has a reading of -151.7. This means that more stocks on the NYSE are declining than advancing, something that occurs near the end of a major top.
The Sector Ratio fell to 20-4 Positive after Friday’s session. Students should continue to watch the Sector Ratio as the week progresses. IF it begins to weaken next week and turns negative, pay attention.
The top five strong sectors were Retail, Service, Material, Consumer Products and Transportation. The four weakest sectors were Energy, Banks, Real Estate and Leisure.
There were NO CHANGES to the Model on Monday. The Model continues to hold trial positions of 1,200 shares of TWM, 1,600 shares of DXD, 400 shares of DUST, and $43,379 in cash. The Model continues to look for opportunities to buy shares of inverse index ETFs.
Gold (GLG) fell 1.47 points yesterday and appears to be completing its counter trend wave 2 rally. One more small pop early next week should do it. After that gold (the metal) should begin a wave 3 decline that could trade down to the 1,700 level. Spot gold closed at 1,939 on Friday.
The Euro and the Dollar still appear to be completing major reversal patterns. This would be a top for the Euro and a bottom for the Dollar. UUP, the ETF for the Dollar rose 0.12 cents on Friday. This puts it inches away from moving to a Buy Signal. EUO, the ETF for the inverse Euro is in the same boat after rising 0.27 cents on Friday. Both potential Buy Signals would be for a Wave 3 up. Students should watch for a signal change next week. Also, IF you’re looking to short gold, you want to see BOTH the Dollar and the inverse Euro move to Buy Signals for confirmation. Also, UDN, the inverse ETF for the Dollar, is still on the Dean’s List near the bottom. If UDN falls off the List and UUP appears, it would be another sign that Wave 3 up in the Dollar is underway. This would be a strong negative for gold.
Bonds also appear ready to start a significant decline. Yesterday’s 0.99 rise in TLT, the 20+year Bond ETF, appeared to be part of the final ticks of ‘Blade’ development in a negative Hockey Stick pattern. The pattern suggest the next move in Bonds will be a significant Wave 3 down. Students should note that TMF is still on the Dean’s List near the bottom. IF TMF is replaced on the Dean’s List by TBT next week, and we the timing indicators for Bonds turns negative, the odds are high that Bonds will experience a major reversal.
A few More Weekend Thoughts
In my WSR, I commented on the unusual breadth that occurred during Friday’s session. So, I went back and looked at what happened the last few times the number of new lows increased to a three month high while the S&P was still in an Uptrend (still making higher lows). There were only three cases since January 2018 where this unusual event occurred. In all three cases the S&P was trading down one week later, with losses of 4.8, 1.4 and 7.2 percent. Given the current conditions, where the market is coming off a major Phi Mate turn date, a Fibonacci cluster window, and with sentiment at 20 year lows (EXTREMELY Bearish), those 4.8 and 7.2 percent loses caught my eye.
The NASDAQ is in a similar boat. Friday’s 2:1 negative breadth on a rally day also has short-term negative implications with losses averaging almost 3 percent a few days later. In other words, next week could get off to a shaky start. If the decline is enough to turn the Market Timing Indicators negative and cause the Dow to fall below 27,624, things could begin to get ugly.
As I said I the WSR, please pay close attention to the indicators and the support levels I’ve been writing about in my two recent posts.
h
Market Signals for
08-24-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 20 Aug 2020 |
NASDAQ | POS | 30 Jul 2020 |
GOLD | NEU | 11 Aug 2020 |
U.S. DOLLAR | NEG | 24 Jun 2020 |
BONDS | NEG | 13 Aug 2020 |
CRUDE OIL | NEU | 14 Aug 2020 |
DISCLAIMER
As always, the Professor never makes recommendations. The information is provided on an educational basis so you can have informed discussions with your financial advisors and/or accountants about your individual investment decisions.
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, Weekend Strategy Review