Weekend Strategy Review December 23, 2018
Posted by OMS at December 23rd, 2018
The markets rose early on Friday from oversold conditions, then fell in the expected re-test of Thursday’s low. The Dow finished the day down 414 points, closing at 22,445. It was down 1,655 points for the week. The NASDAQ was down 195 points on Friday and down 578 points for the week.
Thursday’s intraday low was 22,644, so Friday’s re-test was 200 points below that low which is a bit troubling. The decline pushed the VIX to its highest level in over six months where it closed above its upper Bollinger Band. When this occurs, especially during options expiration week, the markets are usually trading higher a week later. The actual VIX buy signal is when the VIX closes below its Upper Band, so we don’t have a Buy Signal yet. But after watching the small moves that occurred during the late afternoon on Friday, we could be getting close.
One of the reasons I say this is because the market is EXTREMELY oversold at current levels. The crash-like decline has produced three consecutive days of A-D oscillator readings of -215, -268, and -300 on Friday. It’s been a loooong time since I’ve seen readings like this. The decline we saw in early October only produced two days of A-D oscillator readings below -245 before bouncing. Same for the two declines in 2017 where two days of -200 reading were followed by rallies. Also, the two days prior to the before the November 2016 election saw A-D oscillator readings of -227 and -222, which helped kick off the Trump rally. In 2015, there were two days in August that had A-D oscillator readings of -350 and -297 after which the Dow rallied for over 1,600 points. There was a similar two day set of negative A-D oscillator in 2014 that produced a rally, but I had to go all the way back to June 2103 before I found THREE days of EXTREME negative A-D oscillator readings. The market rallied, but the rally was short lived. Two weeks later, the Dow was trading 600 points lower.
So, the take away from seeing more than two consecutive days of EXTREME A-D oscillator readings is NOT positive. We saw what happened in June 2008 when 9 out of 10 consecutive days had A-D oscillator readings below -200, with most readings between -225 and -250. The Dow started down and continued to fall. There was no let up until the my VTI-volume indicator turned positive on 10 July 2008. Right now, my VTI-volume indicator for the Dow and NASDAQ remains on a Sell Signal, so while the market might bounce next week, it’s still a loooong way from generating a Buy Signal.
In Friday’s Comments, I talked about how I was looking to trade Valero (VLO). I did. The stock opened at 70.27 and rose to 72.49 before closing at 71.64. I must have traded it 4-5 times on the short-term bars, taking profits of $100-$300 on each trade. The intraday trades produced a nice profit at the end of the day even though the overall market was down over 400 points. I plan to use the same scalping strategy next week, buying VLO anytime the short-term indicators turn positive. I don’t care what the ‘market’ is doing, IF the signals on VLO turn positive, I’m in.
This is what you need to do in a market like this. Focus! Stop worrying about what the market is doing, or what’s happening in the UK with Brexit, or with Trump and the government shutdown. None of this will make a difference to your trade. No, just pick one stock you want to trade… something you’re comfortable owning and focus on it. This will take your mind off all the bad things that are happening in the world. Turn the TV off so you don’t hear any news during the day. The talking heads don’t know any more than you do, so why listen to them? All they’ll do is make you worry. So, stop worrying!!! Just focus on your stock and instead of worrying, just make sure you’re on the right side of the indicators. It’s that simple. If you’re on the right side of the indicators for your stock, it doesn’t matter what the market is doing. Do you think that the price of Valero is impacted on a 5 minute basis by what happens in England? Do you think that someone trading VLO on the 2s cares about what Trump tweets? Heck, even if he tweeted that Chinese were launching an invasion, it would be 5-10 minutes or more before the news reported the event. I’d be out of the stock by then. So, why would I be concerned about anything other than what the indicators are telling me? Hmmm?
Bottom Line: During this time of turmoil, I want you to relax. I want you to create your own little world where the only thing that matters is your stock. Specifically, I want you to focus on the 35-period CCI and 14-period VZO indicators on the 2, 3 or 5 minute bars. You pick. If you don’t have time to scalp trade, then Position Trade using the hourly bars. Just make sure you focus on one stock and stay on the right side of the indicators.
Students should note that with Valero, I’m NOT shorting the stock. I’m only buying when the indicators are positive. I see no percentage in shorting a stock with a P/E of 6. Most of the trades last 5-20 minutes. So, when I’m trading, the time zone for my world is 30 minutes. I don’t care about anything that happens in the world once I enter the trade. Then once the trade is over, I get a sandwich, check the mail, or do some of the ‘Honey Dos’ that Marcia has planned for me. My computer stays on, but I’m not really focused on it. I take an occasional glance to see where the indicators are, but if they’re not lined up, I take out the trash. At the end of the day, I find myself fully relaxed and most times with a nice profit. With this strategy, I only take what the market gives me. I don’t sit there and hope that the market will do this or that. I don’t care! More importantly, I don’t care about Valero going from 71 to 100. I only want it to go from 71.0 to 71.40. On 500 shares, that’s 200 dollars. A stock like Valero makes 40 cent+ moves all day long! My only concern is being on the right side of the indicators. This is what I do.
BTW, if you don’t have the time to scalp trade an individual stock, you might want to consider position trading it on the hourly bars. Doing this is even more relaxing than scalp trading. Again, just make sure that you stay on the right side of the indicators.
For example, when you saw my market timing indicators on the Dow turn negative, you could have bought a few shares of SDOW using the 60s on 4 December at 15.10. Then you would have sold them at 16.73 on 12 December for a 1.63 profit. Again, with the market timing indicator on the Dow remaining negative, you could have re-entered your position on SDOW on 14 December at 17.43. You would still be in this position as of Friday with another 5.7 point profit. (SDOW closed on Friday at 23.13). Do you care about what the market is doing? No, all you care about is where the indicators are. And right now, they’re still negative. Can you imagine how relaxed your life would be if you simply ignored what was happening in the markets and the world and just followed the indicators?
So now that we’re in the Christmas season, I want you to relax. The way I do this, at least from a market perspective, is to stop worrying about what the market will do. NO! I simply focus on what the indicators ARE doing. As long as they are in my favor, I stay in. When they turn against me, I get out. Doesn’t matter if I’m using the Daily’s, the 60s or the 3s. IF I follow the indicators, I know I’ll be OK.
Again, relax. Enjoy your family, especially your grand kids. Use some of the money you made by being short the market to buy them a BIG pile of presents. They’ll always remember you for it and the smile on their faces will make you feel even better.
That’s what I’m doing,
P.S. With the markets being closed on Tuesday for Christmas, I won’t be posting Comments until after the Holiday. I have a lot of family visiting us between Christmas and New Year’s, so I might even skip a day or two of Comments next week. But IF something important happens, I’ll post a few brief Comments. I won’t leave you hanging.
2018 has been a great year for me and I want to take some time to enjoy my family and smoke a few of the cigars you sent me. And when I do, I’ll be thinking about the students who gave me the stogies. Thank you!!! I wish you all a Merry Christmas.
Market Signals for
|DOW||NEG||06 Dec 2018|
|NASDAQ||NEG||07 Dec 2018|
|GOLD||POS||03 Dec 2018|
|U.S. DOLLAR||NEU||28 Nov 2018|
|BONDS||POS||19 Nov 2018|
|CRUDE OIL||NEG||23 Oct 2018|
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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.