Weekend Strategy Review February 28, 2021

Posted by OMS  at February 28th, 2021

Its starting.  During the week, in the heart of a Fibonacci Cluster Window where we were expecting the markets to top, the major indexes began their pullback.  The pullback started slowly on Monday with the NASDAQ and S&P declining sharply, but the Dow masked the move and finished positive after making a new high.  After watching the divergence between the Dow and NASDAQ, I made my ‘Things are Not OK’ comment. Wednesday saw another snap-back rally on the Dow, which again was not confirmed by either the NASDAQ or S&P.  Again, another sign of trouble.  So, in Thursday’s Comments, I posted several key support numbers for the major indexes and said that if those numbers were violated, they would negate any further Bullish potential. Those key support numbers were then broken in Thursday’s and Friday’s trading.  The Dow dropped over 1,029 points in two days.  The NASDAQ lost over 1,000 points in six trading days.  Welcome to the Bear market.

Before I go further, I want to spend a few minutes talking about how this Bear will be different from the ‘crash’ that we had last February-March where the Dow lost over 11,350 points in six weeks. The February decline was an actual ‘crash’ or in technical terms, it was the major Wave D correction in an ongoing Bull Market. Once the crash ended, the market rallied in a Wave E rally to the final top with Wave E ending in a classic Ending Diagonal Pattern.  The entire five wave sequence started back in March 2009, just after the crash of 2007-2008.  If you pull up a monthly chart, you can clearly see the five waves that developed since March 2009.  And that’s what I want students to understand and contemplate this weekend. All five waves of the primary trend are now complete.  Now it’s the Bear’s time.

The reason I want to discuss this now is because I’m not sure if we’re going to get a ‘crash’ this time.  I believe what’ is far more likely to occur is a slow, but steady decline, similar to what happened in 2007-2008.  The decline will likely be more like a glacier than an avalanche, taking several years to unfold. At the end of the day, the destruction to financilal assets be the same as glaciers always wipe out anything in their path. It just occurs more slowly.  Students should remember that in Bull Markets, the rallies are slow and steady, but the declines are sharp.  It’s just the opposite in a real Bear Market where the declines are slow, and the rallies are robust…. mostly because of the short covering that takes place.  In other words, I believe that a lot of investors will be lulled to sleep by this Bear market as it gives ground slowly at the beginning, with sharp intermittent fake-out rallies.  Then once the initial waves are in place, probably a few months from now, a Major Wave 3 down will begin and drop the Dow several thousand points.  That’s when most long term investors will start to realize they are in a real Bear market, not just a ‘temporary crash’ wave.  By then it will be too late.  They will have already lost a good portion of their life savings.

The reason I’m talking about this now because I don’t want this to happen to my students. Now that five Major Major Waves are complete, we simply don’t know how long or how low the Bear Market decline will last.  Theoretically, the advance since March 2009 can be considered a large Ending Diagonal, so its possible that the low of 6.440 on the Dow will be tested.  The obvious intermediate-term target is the February 2020 ‘crash’ low of 18,213. The reason I say this is an obvious target is because the rally since that low also formed another Ending Diagonal, and as we know, the target for an Ending Diagonal is ALWAYS where it started. So, for now, I’m going to use 18,218 as my target for the first stage of this Bear.  That’s over 12,700 points from current levels.  But don’t worry, the decline won’t happen overnight.  It will likely happen is stages…. slowly.

What happened this week was likely part of the first wave of the decline. It’s hard to address the wave structures on the major indexes at this point because they are all different.  The NASDAQ, is the weakest index and is more advanced in its decline than the Dow or S&P.  It appears to have completed minor wave 1 down of Wave 1 down on 23 February at the 12,758 level.  Friday’s rally off that low was either all or part of minor wave 2 up.  If this labeling is correct, the NDX could rally to the 12,312+ level early next week before the next down draft begins.  The alternate labeling is that wave 3 down completed on 23 February which makes Friday’s rally part of complex wave 4 with wave 5 down to come.  In either case, students should expect to see a lot of EXTREME volatility next week in the tech sector.

The Dow appears to be a little more predictable in its pattern.  That’s because it appears to have completed five minor waves down on Friday.  It’s possible that Friday’s intraday rally was a wave 2 up retracement.  If this is the case, wave 3 down should begin very soon.  I’ll be using a break of Friday’s low of 30,911 as my ‘get short’ number.  My short-term target will be the 29 January low of 29,856.  If the wave 3 decline gets legs, it could go even lower.

The pattern on the S&P is remarkably close to that on the Dow. If wave 3 down starts early next week, I expect the decline will approach the 31 January low of 3,656.  I will be looking to fade any rally on Monday, especially if the S&P makes it back anywhere e to Friday’s high of 3,861.  Anywhere close to this number is good enough for me.

How do I plan to trade the decline?  So far, I have been using two highly leveraged inverse ETFs, SPXU for the S&P and SQQQ for the NASDAQ-100.  I’ve been trading them on the short-tern bars, 5 and 10 minutes, going long every time the ST Indicators give say so. I continue to reduce my positions by day’s end, but now that my key support numbers have been broken, I have been holding a few short positions overnight.  This is the exact opposite of what I tend to do in a Bull Market, when the indicators favor being long overnight.

I have also started to short a few stocks.  But before I give you their symbols, I want to tell you where these shorts are coming from.  None of these stocks are recommendations.  I don’t make recommendations.  I just trade some of the stocks that are being generated by my algorithms or from the Weak List.

Here’s two from the ‘Weak List’:  #7 APPL and #3 FSLR.  I’ve been shorting APPL all this past week, or since its ST Indicators turned negative on 2/9 at the 136 level.  My target for AAPL remains near the 110 level.  I don’t see anything that will change that.  If APPL rallies to the 125-126 level, I will aggressively short the stock. Like I’ve been saying for weeks, I still believe that AAPL will lead the market lower.  APPL will be a key stock in this Bear Market.

First Solar (FSLR) is a short because it’s the higher ranked ‘non-materials’ short on the Weak List with negative ST Indicators.  If it breaks 200 ma support near 80, watch out below.

From my algorithm:  GILD, MCD, MRK, TEVA and RGLD.  Teva (TEVA), an Israeli drug company, has an inverse HS Pattern with a target near the 7+ level.  The stock closed at 10.76 on Friday.  Also, I have been shorting McKesson (MCK) from the 180+ level, after it was highlighted by my algorithm.  Moving average support is at the 164 level.

Friday’s action turned The Tide and the Dean’s List Negative. 

Friday’s action also turned the DMI on the Dow Negative.  The Market Timing Indicator on the Dow (DIA) turned Negative. The same timing indicator for the NASDAQ remains Negative. The Scalp Trading Indicators on the DIA turned Negative. The ST Indicator on the NASDAQ-100 (QQQ) remains Negative.  All the support numbers I mentioned last week were violated to the downside.

The only remaining positive is the Sector Ratio which fell to 19-5 Positive after yesterday’s session.  Because of its make-up, the Sector Ratio is always the last indicator to turn.  So, seeing it decline to 19-5 Positive after Friday’s session should be taken as a major warning.  The top 5 strong sectors are Retail, Service, Banks, Media, and Energy. The five weak sectors were Telecoms, FoodDrug, Computers, PharmaBio, and Household Products.  Continue to pay attention to the Sector Ratio as the week progresses.

The 0-98 Sell Signal kicked out by AIQ’s artificial intelligence algorithm on 12 February was confirmed.  AIQ’s analysis of the sectors generated using the S&P is now on a valid Sell Signal.

Model Update:   There were NO Changes to the Model.  It remains 100 percent in cash.

Protect yourself. 

That’s what I’m doing,

h

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

03-01-2021

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.