Weekend Strategy Review January 12, 2020
Posted by OMS at January 12th, 2020
On Friday, the Dow gapped higher at the open and then proceeded to develop an outside day, a candlestick pattern with a higher high, lower low, and lower close. This pattern is often seen at market tops. It was of one of the reasons the Model increased its position in DXD, the 2X inverse ETF for the Dow, late Friday.
The second reason for the addition of DXD was the fact that the after the opening gap, the ensuing decline started to look impulsive. My indicators on the 60 minute charts of the Dow are now showing signs of weakness for the fist time in weeks. Given that the Dow was at or slightly above its theoretical target level AND the pattern showed five complete waves, I felt the purchase of the additional shares of DXD was justified.
If my analysis is correct, the Dow (and the other indexes) should continue to decline next week as the short-term wave count suggests that a Major Top is in. Yesterday’s decline from the opening gap and the subsequent intraday rally and fall were likely minor waves 1, 2, and the start of wave 3 down within Wave 1 down. We’ll see if this analysis is correct once trading begins next week.
The Dow finished the day 133 points lower, closing at 28,824. It was up 189 points for the week. The NASDAQ was down 25 points on Friday but up 158 points for the week.
Last week I mentioned that January is usually an extremely volatile month for the equity markets. So far this year, the Dow has seen large out-sized moves on 6 of the first seven trading days. The moves were +330, -234, +69, -120, + 161, +212 and -133 points. That’s EXTREME volatility! Big Moves like this are usually a sign that the market is in trouble and ready to change direction. If Friday’s decline continues into next week, students should watch the 28,400 level on the Dow. A decline below that level would conform that the top is in.
A couple of other things to watch going into next week are The Tide and Dean’s List. On Friday, 3 of the 4 breadth indicators that make up The Tide turned negative. This makes The Tide Neutral. The only positive holdout is the Hi-Lo indicator. I should also highlight the fact that the A-D oscillator turned Negative on Friday. This indicator turned Positive on 3 December with the Dow at 28,000. Now the A-D oscillator is negative. This is not good news for the Bulls as it means that more stocks are now moving lower than higher.
Friday’s action also caused a change to the Dean’s List. If you’ve been paying attention to this List, you’ll know that it’s been positive since the rally started in early October, even during the temporary pullback in late November. But on Friday, the Dean’s List turned Neutral as the two inverse ETFs for the Russell 2K, TMW and RWM, moved onto the List. This will also be something to watch as next week unfolds, especially if DXD replaces DIA and DDM. Students should note that even though the Dean’s List is still pretty long, there’s a lot of ETFs on the List with Relative Strength Ratings of only 1 or zero. One good down day next week could produce a significant change to the List.
As for now, the Dow, SPY, NASDAQ, and Russell 2K remain on Buy Signals. However, The Tide and the Dean’s List have turned Neutral. So next week, students should be on FULL RED ALERT and look for changes to the market timing indicators.
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.
Two MAJOR flashing Red Negative sentiment readings remain on the Board. These readings were at or close to the highest readings ever recorded. Like I said when I saw them first appear, they can be early…but they’re almost never wrong.
OK…here’s the Biggy: On Friday, the Sector Ratio fell to 14-10 Positive. That’s the largest negative change in the Sector Ratio we’ve seen in weeks! The Ratio is almost Neutral. More importantly, all but the top three sectors on the Strong List have RS ratings of only 1 or zero. In other words, except for Healthcare (3), Household Products (3), and Cap Goods (2), the remaining sectors on the List are NOT that strong. BTW, seeing Household Products near the top of the Strong List is not comforting as investors tend to move into tooth paste and toilet paper when they start to worry about the overall economy. Hmmm? Weak Sector List was led by Autos, Telecoms, Service, Banks, and Retail. If the market begins to move lower next week, the stocks in sectors on the Weak List should lead the market lower.
Students should take another look at the paragraph I posted in last week’s WSR relating to the Sector List and note how stocks in the top sectors on Strong List performed during the market rally that started in early October. If I’m right about the coming decline, students might want to look at a few stocks in sectors on the Weak List for shorting opportunities. Like I said last week, “If the Ratio begins to weaken and turns negative in the days ahead (which I fully expect), I’ll be watching the sectors at the top of the Weak List. These are the sectors that will lead the market lower.”
Model Portfolio: On Friday, the Model added 500 shares of DXD at a cost of 21.94 per share to its holdings. The Model now holds 1,500 shares of DXD, 300 shares of SQQQ and 500 shares of TMF with a cash balance of $75,587. The Model is currently up just under 29 percent after yesterday’s session.
The market timing signals for Gold, the Dollar, Bonds, and Crude Oil are at a point where they could begin to change next week if the equity market is topping. I want to see what happens in equities before committing funds to these markets.
I continue to believe that positions established in inverse index ETFs from current or higher levels on the Dow will prove to be big winners in the months ahead once Wave 5 up completes. My initial target for the next wave down, after a break of 28,400, is the 27,325 level. After that, a break of the 26,600 level should lead to further weakness, with a re-test of the December 2018 low of 21,713 possible.
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||POS||11 Dec 2019|
|NASDAQ||POS||12 Dec 2019|
|GOLD||NEU||09 Jan 2020|
|U.S. DOLLAR||NEU||08 Jan 2020|
|BONDS||NEU||02 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.