Weekend Strategy Review December 20, 2020
Posted by OMS at December 20th, 2020
Both the Dow and NASDAQ started the day off on Friday by making new highs, but broader S&P was having none of it as it gapped lower out of the gate. The inter-market divergence was an early sign that something was wrong, especially when the DIA gapped lower at the open while the DJIA touched its new high for about a minute.
Like I said, something was wrong. The new high on the Dow of 30,344 appeared to be the final brick in the wall necessary to complete the Ending Diagonal Pattern that has been developing since the 12 November low of 28,902. This low is an important number because it now becomes the next target for our overall pattern. Ending Diagonals almost always fall to the place where the pattern began. So, as they say on draft day, 28,902 is now on the Board.
As the Dow was falling late Friday afternoon, it started to break below the lower trend line of the ED Pattern I had on my trading screen. I was wondering if I was witnessing the start of the next Bear Market. But alas, this was not to be as Friday was a Triple Witching Options Expiration day, and the big boys had too much premium at risk to let that happen. So, they bought a few key stocks to rally the market, keeping it above the 30,000 level so they could keep their premium.
The final numbers showed the Dow losing 124 points on Friday, closing at 30,179. It was up 133 points for the week. The NASDAQ was down 9 points on Friday but gained 378 points for the week. So even though both indexes had a relatively good week, I don’t want to sugar coat what happened on Friday. The ST volume indicator AND the volume portion of my VTI turned negative. Volume indicators are usually the first indicators to turn negative in a major pattern. They tell me that the rally is running out of gas. Once the tank is dry, the rally begins to lose momentum. We have been watching this happen for weeks now, as our key momentum indicators on the Dow started to show negative divergence and then moved out of the Trend Mode on 7 November, telling me the final top was fast approaching. The only question I had was where the market would finally top before the momentum shifted. There’s a good chance we found that out on Friday.
Anyhow, now that the Dow has reached a new high, completing a picture perfect five wave pattern, the level that needs to be watched now is 30,000. Being more specific, the level is Friday’s low of 30,029. A decline below that low would likely signal the start of minor wave 3 down within Wave 1 down. I’m labeling Friday’s early decline and late rally as minor waves 1 down and 2 up. So, IF the market starts to decline impulsively on Monday, and that decline breaks below the 30,000 level, you should have a fairly good idea of what’s happening. It will put the 28,902 level at the top of the Board.
I am once again on Red Alert.
Bottom Line: After Friday’s opening pop that reached a new high, I’m no longer short-term Bullish. I’m still not totally Bearish, but an impulsive break below 30,000 will cause that to change. The 30,000 level is my new line in the sand. BTW, you might be asking yourself why is the line so important? Hmmm? Well, IF I’m right about the patterns, the Ending Diagonal should complete the final rally of the Bull Market that started back in March 2009. The decline (crash) that occurred last February was Major Wave 4 of that Bull Market and everything since has been part of Major Wave 5 up. The Ending Diagonal is the final wave (Wave 5 up) of the five wave sequence that started last March. So, if the Great Bull is over, once the Dow reaches the low of the ED (28,902), the next target after that is the 30 October low of 26,144. If this happens, it implies that there will be a lot more downside targets after that as the Bear begins to take its toll. That’s why the 30,000 level is so important. It’s the set-up for things to come.
Yesterday’s decline caused the volume indicator on the Dow to turn negative, so the Market Timing Indicator for that index is now Neutral. The Market Timing Indicator on the NASDAQ remains Positive. Students should note how the Bollinger Bands on the Daily chart of the Dow have tightened. Tight Bands usually mean that a Big Move is coming. Be careful if the market begins to move down.
The Dean’s List remains positive; The Tide remains Neutral. As of Friday, 3 out of the 4 breadth indicators that make up The Tide are now Negative. The only indicator keeping The Tide neutral is the Hi-Lo indicator. If that indicator turns, be careful! You do not want to see the breadth turn totally negative in this market.
The Sector Ratio remains strong at 23-1 Positive. But the RS of the sectors is not anywhere as strong as it was a few weeks ago. Right now, the rankings are mostly 2s, 3s, 4s, and 5s. Just last week the top sectors were showing 10,12, and 16. The top 5 strong sectors are Energy, Media, Service, Semiconductors, and Financial. The one weak sector is Real Estate.
Most energy stocks have moved out of the Trend Zone. This started to happen last Monday, telling us the nice run up they made was likely coming to an end. Students using the SC indicators saw this coming and started placing tight stops. Remember, no trend, out! There is no point in putting your money at risk when a stock is not trending.
Other non-energy stocks near the top of the MWL, like DDD, CLF and BIDU continued to rally. But even super star CLF saw its trend indicator turn negative on Friday, telling me it was time to take profit. Tesla (TSLA) now occupies the top spot on the List as it finishes its final Wave 5. You all know how I feel about that overpriced stock.
Gold and the miners: Last week, I said gold (the metal) would likely make one more rally to complete its zig-zag pattern. The pattern could turn out to be a slightly more complicated double zig-zag if it pushes toward the 1,900+ level next week, but it doesn’t have to. Once the zig-zag is complete, gold should fall below 1,700, with 1,675 to 1,690 being likely targets. If gold and mining stocks begin to appear on the Weak List in mass, I’ll look to short the miners. Not now. It’s still a bit too early.
BTW on Thursday, I bought a few long-term Put Options on the SPY. I bought 50 December 16, 2002 Put with a strike price of 100. Paid 0.86 cents, so the Puts cost me about $4,300. The SPY is currently trading near 369, so the 100 strike price is a looong way away from current levels. But that’s OK; I’m using it as my speculative bet for the year. I’ll re-evaluate the trade a few months from now.
Model Update: The Model remains 100 percent in cash.
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.
That’s what I’m doing,
h
Market Signals for
12-21-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | NEU | 18 Dec 2020 |
NASDAQ | POS | 23 Nov 2020 |
GOLD | NEU | 17 Dec 2020 |
U.S. DOLLAR | NEG | 07 Dec 2020 |
BONDS | NEG | 09 Dec 2020 |
CRUDE OIL | POS | 11 Nov 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