Weekend Strategy Review January 17, 2021

Posted by OMS  at January 17th, 2021

The markets gapped lower at Friday’s open, continuing the decline that started from Thursday’s high.  The two-day decline was likely wave 1 down of the next Major Bear Market. Friday’s afternoon rally from the low of 30,613 was likely part or all of retracement wave 2 up.  Depending on what happens when the markets open on Tuesday…they’re closed on Monday because of the Martin Luther King Holiday, the Dow will either make one smaller rally to complete wave 2 up, or it could begin to fall hard in a wave 3 decline.  Either move is possible.  Doesn’t matter. What matters is that you prepare yourself for the probability that the next Bear Market is underway.

Why do I say this? 

For the past few weeks, the Dow and the other major indexes have been pushing higher in what appeared to be final ‘through-over’ wave of wave 5 up of a five wave pattern that started from the 23 March low of 18,214.  The final wave formed an Ending Diagonal Pattern, a pattern usually found at then end of a major rally. As the Ending Diagonal formed, significant negative divergence developed in most of the breadth indicators.  The final rally was also accompanied by historic Bullish sentiment readings, most of which have not been seen for 10-20 years.  I reported on these during December, so I won’t go into detail here.  All I’ll say is that these readings are still on the Board…. investors are way too Bullish!  Financial advisors and hedge fund managers are all in.  They’re usually wrong.

So, against this backdrop we have been watching the final waves of the Ending Diagonal develop. What I have been looking for is the Dow to make a lower low.  (You can’t tell when the top is in unless the Dow or other indexes make a lower low.)  So as the Dow continued to move up, I posted a series of numbers that I called ‘lines in the sand’.  These ‘lines’ were previous lows made by the Dow as it moved up, the latest being last Friday’s low of 30,890.  So, when Friday’s decline moved below 30,890, it was the first sign that momentum was shifting to the downside.  We had our first lower low. The decline was also enough to turn the Scalp Trading volume indicator negative.  For the past few months, we’ve seen what happens when the ST volume indicator turns positive …. top stocks on the Member’s Watch List move higher.  Now, that’s no longer the case.  The ST volume indicator is now Negative. So, taken together with the Bullish sentiment, the five complete waves of the Ending Diagonal Pattern, meeting my target of 31,200+, a new lower low, and now a change in the volume indicator, I MUST now start looking to trade this market to the downside.  The odds are no longer favorable for trading stocks to the upside.  It’s likely the next Bear Market has started…a Bear that will likely last for 2-3 years.  

What do I expect for lower prices?  Well, for starters, the Ending Diagonal on the Dow suggests a move down to the 26,144 level.  This is where the Ending Diagonal for wave 5 up began on 30 October.  ED’s almost always decline to where they began.  There might be some resistance to that decline near the 28,000 level which is where the 200-day moving average is located.  But once the 200 is violated, the decline should be relatively uninterrupted.  There’s really nothing but air between current levels and 26,144…by ‘air’ I mean not much support.  Beyond that is the real question, as the rally since the March low of 18,213 can be considered another (larger) Major Wave 5 Ending Diagonal. So, from a technical perspective, this low could also be tested.  

BTW, my initial target for the S&P is near the 3,700 level.  Beyond that is the ED target of 30 October low of 3,234.  It has the same pattern as the Dow.   Last week, I said the S&P would likely top near the 3,840+/- level.  It topped at 3,827. 

Also, even though I’m starting to get really negative about this market, if the Dow rallies to a new high it would negate these Comments and my analysis.

Bottom Line:  A major Bear Market is likely starting, and students should begin thinking about how to protect themselves. 

I am now on full Red Alert.

Most of my indicators are in the process of tuning.  The DMI on the Dow (DIA) is still slightly Positive, but the same indicator on the Q’s is Negative.

The Market Timing Indicator on the Dow has turned Negative. The same timing indicator for the NASDAQ has turned Neutral.  The ST volume indicator has turned Negative…. Pay Attention!

The Dean’s List remains Positive; The Tide has turned Neutral.

The Sector Ratio weakened to 22-2 Positive.  The top 5 strong sectors are Insurance, Energy, Media, Banks, and Retail. The two weak sectors are Household Products and Telecoms.  If the market starts to decline next week, look for the Sector Ratio to begin to turn negative.  That would confirm that the next Bear Market is underway.

Top Stock Rotation Strategy:  Ok, you all know what to do here, or should know after watching my follow-on training video.  If you’re still in some of the top stocks, watch the trend indicators.  Once the uptrend ends…get out.  BTW, there’s nothing wrong with taking a few bucks off the table now that the volume indicator on the DIA has turned negative.  Remember what the Professor says about Hogs.

But now that the ST Volume Indicator has turned negative, we need to start looking at the short List.  Problem is there is no short MWL on the web site, so I’m going to have to tell you what’s on the List right now. For starters, I see a lot of gold and silver related stocks at the top of the Weak List. PAAS and WPM, two silver mining stocks, are #1 and 2 on the Weak List.  CDC, another mining stock (silver?) is in the #4 position with FNV (gold -silver) at #7.  Our old friend NBR is # 3 on the List, but its ST indicators are still positive, so I’m gonna pass on it…at least for now.  Anyhow, with a negative ST volume indicator on the DIA and 4 of the top 8 stocks on the Weak Lost being gold/silver related, I’m going to focus on the miners for now.  Looking at the chart for silver, it’s possible that a wave 3 down could drop silver (the metal) to the 21.65 – 21.70 level.  Silver closed at 24.75 on Friday.  Here’s the deal:  silver is likely either completing a minor wave 2 up or could rally to the 25.95 + level before wave 2 up completes. So, depending on what happens on Tuesday, I’m going to look to short the top two mining stocks on the Weak List.  Why?  It’s simple.  The market appears to be headed down and these are the weakest stocks on the List.  I’m going to use the indicators on the 15 min bars to trigger the trade.  The ST volume indicator / top stock from the MWL combination has been so successful for the past year at identifying winners to the long side, I want to see how it does on the short side now that the ST volume indicator has turned negative.

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

Have a great Holiday weekend.  Stay safe!

That’s what I’m doing,

h

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

01-19-2021

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.