Weekend Strategy Review December 29, 2019
Posted by OMS at December 29th, 2019
The markets were mixed on Friday. The Dow finished with a gain of 24 points, closing at 28,645. It was up 190 points for the week. The NASDAQ was down 16 points on Friday but up 81 points for the week.
The markets continue to trade in very narrow rising channel that appears to be the final through-over wave on a large Ending Diagonal Pattern. Once the positive effects of the ‘Christmas Season” complete, the markets should begin a decline that will likely last through 2020 and perhaps well into the next decade.
One of the reasons I say this is because so many of the sentiment indicators I watch are now at Extreme levels of Bullishness. During the past few weeks I have mentioned several times how the Put /Call ratios on the CBOE were at historic levels. Many times, these reliable indicators of investor optimism are several days early, but they are almost never wrong.
This past week I was looking at another reliable indicator of investor sentiment called the Dumb/Smart money indicator. The indicator was developed by Jason Goepfert and measures exactly what it says…the sentiment of smart vs. dumb money. Right now, the measure of Dumb Money in the market is at 88 percent, the second highest level ever recorded. Smart money is at 17 percent.
These indicators measure investor optimism, which rises while the market is having a good run, like now. Investors always think that the rally will continue, and they buy when the market is near or at record highs. They’re almost always wrong.
The large Ending Diagonal Pattern that we have been trading for the past few months suggest that a major top is at hand. All five waves of the pattern are now complete. This pattern has a target of where it began back in December 2018 near the 21,700 level. Beyond that are even lower levels projected by a Major Shark’s mouth or Megaphone Pattern, which has a target well below 10,000. In other words, while the investment picture is rosy for the moment, I don’t see any pattern beyond the current rising trend channel that is Bullish. What I do see are several patterns that suggest significantly lower prices well into the next decade.
The patterns will begin to trigger once the Dow falls below the 28,240 level. This is the level I will begin adding inverse ETFs to the Model’s current ‘trial’ positions. A move below 27,325 will remove all doubt about the decline and the Model will become fully invested to take advantage of the next Bear Market.
As for now, the Dow, SPY, NASDAQ and Russell 2K remain on Buy Signals. However, because five complete waves in the Major Ending Diagonal Pattern are now complete, the signals could change at any time.
The markets remain at a critical point in their patterns, showing negative divergences and sentiment readings that suggest they could begin to change direction in the days ahead.
The Sector Ratio fell to 22-2 Positive after Friday’s session. Students should continue to watch for signs that the Ratio is weakening before becoming aggressive to the shot side. The Strongest Sectors were Energy, Retail, Semiconductors, Healthcare, and PharmaBio. The two weak sectors were Service and Telecoms.
So, relax. Enjoy this Holiday Season with your family and friends. Once we get back from celebrating the New Year, I fully expect to see a Major change in our market timing indicators. A break below 28,240 and a Sell Signal on the Dow should make 2020 a very profitable year to be trading.
Have a great weekend and a Happy New Year.
That’s what I’m doing,
Market Signals for
|DOW||POS||11 Dec 2019|
|NASDAQ||POS||12 Dec 2019|
|GOLD||POS||13 Dec 2019|
|U.S. DOLLAR||NEG||09 Dec 2019|
|BONDS||NEU||26 Dec 2019|
|CRUDE OIL||POS||26 Dec 2019|
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.
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