Weekend Strategy Review January 26, 2020

Posted by OMS  at January 26th, 2020

The markets fell hard on Friday, but not enough to turn the market timing signals negative.  The Dow finished 170 points lower, closing at 28,989.  It was down 358 points for the week. The NASDAQ was down 88 points on Friday and down 74 points for the week.

On Friday, the Dow broke impulsively below the key 29,050 level I mentioned on Thursday.  So, the first of the three tells I’m looking for is in.  Now I need to see the market timing indicators turn Negative AND be able to count five waves to the downside.  

Unfortunately, even though Friday’s decline was impulsive, I still don’t see a five wave pattern to the downside that would suggest a trend change.  Same for the S&P. However, I can count five waves down on the NASDAQ. So maybe, just maybe Friday’s action was part of wave 3 of Wave 1 down on the Dow and S&P.   We should know early next week. Remember, it’s still very early in the turning process if this is what’s happening.

What Friday’s decline did do was turn the market timing indicators Neutral. This is the first time the indicators have been Neutral since early December, when the Dow was completing its wave 4 of 5 up on 3 December.  Before that, the indicators haven’t been Neutral since early October. So, seeing the indicators turn Neutral is something that should put us on our toes.  The fact that they turned Neutral while market sentiment is at EXTREME levels should also highlight the need for caution.

On the other hand, the DMIs for the Dow and NASDAQ are still Positive, as are the Dean’s List and the Sector Ratio.  The Tide is Negative.  So, like I said, it’s still early.

BTW, now that the Dow has broken below the 29,050 level, the odds are about 60-40 that the Dow has topped and is in the process of developing a wave structure that would suggest lower prices.  However, students should watch the 29,100 level on any bounce, because IF the Dow exceeds that level, it means that Major Wave 5 is NOT over, and the current decline is part of wave 4 down of Wave 5 up.  If this is the case, wave 5 up could take the Dow above the 29 400+ level before Major Wave 5 up completes.

When I look back at to see how the market turned in 2000 and 2007, I see very similar wave patterns.  Back then, the Dow was the first to turn as it did recently on 17 January.  The second index to turn was the S&P which recently peaked on 22 January.  The last index to turn was the NASDAQ, which peaked yesterday.  Also, yesterday’s decline on the NASDAQ was impulsive AND accompanied by heavy volume.  So, the thing I’ll be watching early next week is for the impulsive action on the NASDAQ to carry over to the Dow and S&P.  If it does, it should turn the timing indicators negative which will be my signal to add additional inverse shares to the Model.

All I’m doing now is waiting for conformation that the market has topped and is beginning to roll over.

The Sector Ratio fell to remained at 17-7 Positive after Friday’s session.  The Strong Sector List was led by Household Products, Computers, Real Estate, Foods, and Healthcare. The Weak Sector List was led by Energy, Banks, Service, Autos, and Material. 

Model Portfolio:  There were NO CHANGES to the Model after Friday’s session.  The Model continues to hold 400 shares of TZA, 300 shares of VXX, 1,500 shares of DXD, 300 shares of SQQQ and 500 shares of TMF with a cash balance of $57,890.  The Model is up 29.7 percent after Friday’s session.  The Model remains well positioned to take advantage of the decline that the sentiment, volume, and breadth indicators are suggesting.

Have a great weekend.

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

01-27-2020

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