Weekend Strategy Review August 25, 2019

Posted by OMS  at August 25th, 2019

The markets fell hard on Friday, after President Trump “ordered” US companies to find “an alternative to China” for doing business after the country slapped new tariffs on $75 billion of U.S. goods in retaliation for Trump’s latest tariff hikes. Those hikes would increase import duties on US-made autos and auto parts by 10 percent and 5 percent and would take effect on Sept. 1 and Dec. 15.  The announcement sent stocks reeling. 

The Dow finished down 623 points, closing at 25,629.  It was down 257 points for the week. The NASDAQ was down 240 points on Friday and down 144 points for the week.

The market timing indicator on the Dow, NASDAQ, SPX, and Russel 2K are on Sell Signals.

The Tide and the Dean’s List are Negative.

Friday’s decline was impulsive, so it’s likely that Wave 3 down of Major Wave 1 down has started.  This wave has an immediate target near or below the 24,680 level. However, IF the 24,680 level is broken on this leg down, the next target becomes the 26 December 2018 low of 21,713 once all five waves of the decline are complete.

The NASDAQ broke below 7650, the level I mentioned early Friday as support from a small rising wedge pattern.  The technology index finished at 7465. If you shorted the Q’s you were probably up over 5 points.  If you bought the QID, your profit was probably near 1.80.  Like I said, Rising Wedges are very reliable patterns, and this one appears to be final wave ‘c’ up of corrective Wave 2 up.  My target for the NASDAQ-100 remains near the 7200 level. 

I spent some time this week looking at the longer term patterns for the market and was somewhat surprised at what I found.  While the near term picture is pretty clear (lower prices as Wave 3 down unfolds), the thing that’s not as clear is what happens AFTER the current decline is over.  The reason I say this is because one scenario I have for the Dow suggests the current decline is part of a much larger pattern and that after the initial decline to 21,713, stocks will rally to new highs.  In other words, the decline to 21,713 would only be Major Wave ‘D’ down, with Major Wave ‘E’ up to come.  My alternate scenario is a much scarier scenario.  It suggests the decline to the 21,713 level is only the beginning.  The eventual target for this scenario is below the March 2009 low near 6,500.  This would mean that the Bear Market would last for another 4-5 years, minimum!  Right now, I’m not worried about either of these two scenarios.  I’m just focused on the move down toward 24,680 for now. 

Friday’s decline caused IYT, the transportation ETF, to drop 5.98 points to 175.56.  Remember, the 175 level is where H&S neckline support is located.  A break of this level would mean the trannies are headed a lot lower.  BTW, I shorted several transportation stocks in my own personal accounts on Friday and had a nice day.  I exited these short positions near the close, mostly because the 2-period RSI was oversold and given that Friday’s decline was news driven, I didn’t want to hold them over the weekend.  If the market bounces on Monday, I’ll look to re-establish these shorts.  Here’s the thing:  If the trannies start breaking below 175, they will set up trades similar to what’s been happening with gold.  Think back to when I started talking about gold in late May, when GLD was in the low 120s.  The reason I was excited about gold was because it was about enter a Wave 3 rally phase.  When a stock or ETF is in a Wave 3 rally phase, trading it becomes almost a no brainer.  If you make a mistake in timing, it’s usually OK, because the metal was headed a lot higher.  Same for the trannies. IF IYT breaks below 175, it would signal that the Dow transports are likely going to decline from current levels just under 10,000 to about 8,300.   In other words, there’s still a lot of juice in that lemon that can be squeezed.

Gold rallied on Friday as equities fell.  GLD jumped 2.77 points to 144.17.  I still believe that GLD can move a few points higher, possibly to the 147-148 level on this move.  Just remember, no stock, no matter how good, goes to heaven.  Once GLD reaches its Wave 3 up target, it will likely begin a complex Wave 4 pullback.  At this point, I have not mapped out how Wave 4 in gold will unfold.  But my first take after reviewing the chart was that it appears complicated.  I have one scenario that says Wave 4 down could see gold fall back to the 1,000 level (Yikes!!)  But let’s not go there yet.  It’s way to early to tell, so for now, let’s just enjoy the ride up.

BTW, as long as we’re talking about gold, you might wonder what could cause such a massive decline?  Hmmm?  Well, it has to do with debt and deflation.  One of the things I’ve been telling you to do is to watch Bonds.  A few weeks ago, I said they are heading a few points higher.  But now that TMF has risen from 24 to 35, again, no ETF goes to the moon. Europe is currently a mess with its bonds (debt).  It’s to the point of insanity!  With several of the major European companies having junk bond status, it means that these companies are now getting paid to borrow money. Think about this for a minute.   Would you lend money to someone who has been totally inept at managing his company, and then actually PAY him to take your money?  That’s right…you’d get no interest.  You’d pay him to take your money.  Does this make any sense to you?  But that’s what’s happening in Europe.  This can’t last.  At some point, maybe tomorrow, a few sane investors will stop giving money away to these under performing companies and begin to demand more money (interest) on these risky loans.. And once interest rates start rising, the bonds of these companies will get crushed.  CRUSHED!!!

And it’s not only European companies.  Right now, all the bonds of Germany, Denmark, Switzerland and Sweden have negative interest rates. That’s right…you pay them to keep your money.  What a deal!  And it’s a BIG DEAL…. there’s currently more than $40 trillion of negative yielding bonds in the global economy.  What happens if …IF interest rates start to rise?  It’s only going to take a few sane investors to ask for more interest on the risk they’re taking, and these global bonds will get CRUSHED!  This is the kind of stuff that creates a major deflation in assets, including equity prices, real estate…and gold.

Anyhow, I didn’t want to go down that rabbit hole this weekend, but I did.  The enormous debt that consumers, businesses, and countries have accumulated during the past 10 years will eventually cause a lot damage to a lot of markets, including equities. Yesterday’s decline was likely the start of the next wave down. Protect yourself.

The Sector Ratio fell to 7-17 Negative after yesterday’s session.  The Strong Sector List was led by Semiconductors, Computers, Telecoms, FoodDrugs, and Household Products.  The Weak Sector List was led by Real Estate, Autos, Energy, Retail and Transportation.  

Model Portfolio:  The Model continues to hold 650 shares of UGL (gold) and a lot of cash.  Holding cash is good right now. The Model continues to look for high probability entry points and will likely begin to put some of its cash to work next week.

After Friday’s session, the Model is up 29.1 percent, a new high, which translates to an annualized gain of 68.2 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 the cheat sheet I will be using for my trades next week:  

1. Dow:  Appears to have topped with Wave 3 of Major Wave 1 down starting. First target probably near the 24,700 level. Alternate is that Friday’s decline was wave ‘b’ down of an a-b-c move. If this is the case, Dow could still rally back to 26,500+ before falling after Labor Day.

2. NASDAQ-100:  Now that 7,650 has been broken, look for lower prices, down near 7,200. Alternate is similar to the Dow – an a-b-c move back up to about 7,650 before falling.

3. SPX:  Lower, toward 2,790. Alternate is an a-b-c move back up to 2,960 before falling.

4. Russell:  Lower toward 1,420 to 1,430. Short on bounce.

5.Trannies (IYT): topping near 185.50-186, then testing 175.  If 175 doesn’t hold…it will be a long way down.  Look to short transportation stocks.

6. Gold: Currently at 1,537. Target between 1,600-1,650. GLD target near 147+ Mining stocks overbought and could start pulling back. Focus on gold, not miners.

7. Crude Oil: Still stuck in triangle. WTIC should trade down to 48 on current leg down, then rally to 56. Look to short WTIC this week by buying SCO.

8. Dollar: Now at 97.5, should top a bit over 100. After that look for signal change with 94 level likely. UDN is back on DL. Also, if $ signal turns negative, look to buy ULE, the ETF for the Euro. As Dollar drops, Euro should rally.

9. Bonds: Topping. Look to buy TBT when it appears on Dean’s List to trade minor wave 4 down. Short-term trade only as Bonds still have one more leg up to complete pattern.

10. Europe: Short Europe with EPV on any rally. HS Pattern suggests move to 36-37. Same for Emerging Markets with EEV. Target near 52-53.

Market Signals for

08-26-2019

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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.