Weekend Strategy Review February 2, 2020
Posted by OMS at February 2nd, 2020
We’re not in limbo anymore. Friday’s decline confirmed the start of a new Bear Market. Two days after a Major market turn date and recording historically low sentiment readings, the Dow has now declined over 1,091 points. When I saw these sentiment readings last week, I said that while they can be a little early, they are never wrong. Turns out the EXTREME sentiment readings were about a week early. I’m OK with that. I’m also OK with the fact that the Model exited its short positions on Thursday, moving 100 percent into cash. Like I said on Thursday, I don’t see any point in holding ANY position when the indicators are either mixed or are not clear. When it comes to money, I’d rather wait for clarity and favorable odds before risking my money. I didn’t have either of these as I entered Friday’s session.
As things turned out, the Dow fell 603 points on Friday, closing at 28,256. It was down 734 points for the week. The NASDAQ was down 148 points on Friday and down 164 points for the week. The Dow has given back all its gain for 2020 and is now down 617 points since the start of the New Year.
Friday’s decline was the Big Move predicted by Thursday’s small change in the A-D oscillator.
After rising to 28,890 on Thursday, the Dow fell hard on Friday dropping below the key channel support at the 28,500 level. The decline was a steady impulsive drop and while it confirmed the start of the new Bear Market, it did not clarify the short-term wave count. We’ll need to see what happens on Monday for that. Why do I say this? Hmmm?
Well, because the Dow closed below Wave 1 down’s theoretical target near the 28,300 level, it’s possible that Friday’s decline was the start of Wave 3 down and not the completion of Wave 1 down. This is a Big Deal. IF Friday’s decline is part of Wave 3 down, it still has a lot more decline to go before bouncing, probably another 500-600 points. Beyond this is the 3 December low of 27,325 and the 200-day moving average at the 27,203 level. These lows should be touched at some point during the Wave 3 decline, but how the Dow reaches these levels is still problematic.
Once thing we need to remember now that the Bear has started is the market will not completely collapse from current levels. It will move down in waves. Between each of these declining waves, there will be several large rallies. (BTW, the large rallies are a significant characteristic of a Bear Market). That’s because a lot of traders will be placing large bets on the short side. And once a rally starts, these same traders will panic and buy back their short positions which adds fuel to any rally. Rallies in a Bear Market tend to be large, so pay attention anytime you see a large rally AND there is a small change signal from the A-D oscillator.
Anyhow, let’s assume for a moment that Friday’s decline was the start of Wave 3 down. How far down could Wave 3 fall based on Elliott Wave analysis? Well, if Wave 1 down was 934 points, Wave 3 down should be about 1.5X this or about 1,400 points as a minimum. That puts the theoretical target for Wave 3 down near 27,544. This is slightly above the support provided by the 3 December low and the 200-day moving average. So, it’s likely that Wave 3 down will complete somewhere between 27,200 and 27,550.
But like I said, the decline won’t be straight down. This is because Wave 3 down is an impulse wave, so it MUST consist of five waves. Friday’s decline was likely part or all of wave 1 down of that decline. If the Dow rallies on Monday, we’ll have a better idea of how Wave 3 down will develop and where wave 2 up will complete. But right now, this is not clear. We’ll need to see where wave 1 down of Wave 3 down completes before we can make a projection for wave 2 up. So, we need to pay attention to any rally. Now that the Bear has been confirmed, we will be looking to fade these rallies. The odds are heavily weighted in our favor if we establish short or inverse positions during the rallies. Even if we don’t catch the top of a rally wave, the odds that the market will decline below our entry points are high.
So next week, the Model will start looking for entry points to re-establish its short positions.
After Friday’s session, the Dow, SPX (SPY) and Russell 2K remain on Sell Signals. The NASDAQ remains on a Neutral signal. The Dean’s List and The Tide are Negative. The DMI on the Dow is Negative while the same indicator on the NASDAQ-100 (QQQ) remains Positive.
The Sector Ratio finally turned negative on Friday, moving to 8-16 Negative. Once the decline begins in earnest, the Ratio should approach 4-20 Negative or less.The Strong Sector List was led by Household Products, Food, Real Estate, Utilities and Computers. The Weak Sector List was led by Service, Energy, Autos, Banks and Materials.
Model Portfolio: There were NO CHANGES to the Model after Friday’s session. The Model moved to a 100 percent cash position during Thursday’s session. The Model’s conservative approach to trading leveraged ETFs is up 32.12 percent since it was started on 26 February 2019.
Be patient. Now that the Bear market has begun, we still have a lot of decline to go before the Dow reaches its final low near or below the 23,000 level. The December 2018 low of 21,713 remains a realistic target.
I took some time this morning to examine how the Model Portfolio performed since it started almost 11 months ago. I found the results interesting, so I thought I’d share them with you. But before I get into the numbers, I want you to understand how I approached the Model, given that this was the first year that I was using my new Market Timing Indicators (MTI) as a decision tool. Because of this, I wanted to be extremely conservative. When I say ‘conservative’, I mean that instead of taking all signals generated by the MTIs, I focused mostly on those signals where the pattern suggested that the ETF was about to enter a significant trend. In other words, I consciously tried to avoid trades where I thought the trade was a counter trend trade, like a Wave 2 or Wave 4, or IF I thought the market or ETF was approaching a major turning point. In many cases, this approach proved to be too conservative as the Model missed several lucrative trades. The Dow’s recent rally from 6 December to its recent Sell Signal is one example of this.
If the Model bought 800 shares of DDM on 7 December and sold them at the open the day after the MTIs turned negative, the gain would have added another $1,688 or 1.78 percent to the Model’s performance. Looking back, there were several trades in crude oil that were also not taken. The recent short in Crude Oil where the Model did not choose to buy SCO (inverse ETF for Crude Oil) as the signal suggested is another example. IF SCO was purchased when the MTIs gave say so, the 1,000 shares would have added another $3,950 or 3.61 percent to the Model’s gains. So, IF the signals on these two trades had been followed, it would have added another 5.39 percent to the Model’s gains. There were several other trades in gold not taken that could have increased the performance of the Model.
Never-the-less, the Model performed admirably. Here’s the numbers:
Out of a total of 76 trades, there were 51 winners, 24 losers and one break even for a win percentage of 68 percent.
Total gain to date is $32,168 or 32.2 percent. This equates to 34.85 percent on an annualized basis.
Because the Model only used a portion of its available cash, the average annual ROI was 101.4 percent.
The average profit per trade on the winners was 7.29 percent; the average loss per trade on the losers was 4.3 percent.
The Reward-Risk ratio was 3.58. As a trader, this is perhaps the most interesting statistic for me as it tells me I’m probably being too conservative. As most of you know, when I trade, I like to have a Risk-Reward ratio of 2.5 to 1. If my winners make over twice as much money as my losers lose, I can be right half the time on my picks and still make money. So, seeing the ratio at 3.58 percent should tell you something too, especially if you tend to focus on what the Model is doing. You probably can do better.
By better, I mean that you might want to put more emphasis on the Market Timing Signals instead of the Model. Only you can judge how you want to structure your portfolio and the amount of risk that you want to assume. For example, if you’re older, like me, you might want to take a more conservative approach and structure your portfolio along the lines of the Model. If the Model’s conservative philosophy is helping you generate additional income, you might not want to change anything. On the other hand, if you’re younger, or a riverboat gambler, you might want to become more aggressive and take more trades when you see changes to the Market Timing Signals.
I know that seeing the above numbers has made me think about a few things I want to change in the months ahead. For example, after seeing the Model’s high win percentage, I will probably want to put more money to work. I hope that by seeing and understanding the above numbers, they will help you structure and trade your portfolio.
So before you sit down with your friends to enjoy the Super Bowl, take some time to think about how you’re going to manage your money in 2020.
That’s what I’m doing.
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.
Market Signals for
|DOW||NEG||31 Jan 2020|
|NASDAQ||NEU||24 Jan 2020|
|GOLD||POS||17 Jan 2020|
|U.S. DOLLAR||NEU||31 Jan 2020|
|BONDS||POS||22 Jan 2020|
|CRUDE OIL||NEG||10 Jan 2020|
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.