Weekend Strategy Review January 5, 2020

Posted by OMS  at January 5th, 2020

The markets fell hard on Friday after the U.S. killed a top Iranian general.  After an initial decline that dropped the Dow to the 28,500 level, the Dow stabilized to close 234 points lower at 26,634.  The Dow was down 10 points for the week. The NASDAQ was down 71 points on Friday but up 14 points for the week.

January is usually an extremely volatile month for the equity markets and the start of this one appears no different.  The current rally has completed all five waves of a five wave structure, so the decline I see coming could begin at any time now. Friday’s decline after Thursday’s rally to 28,872 could have been the start of that decline.  We won’t know for sure until the Dow begins to break below the 28,400 level and the market timing indicators turn negative.

For the past week+, I have been writing about the high market sentiment readings being at levels I have not seen for years.  On Thursday, when the Dow reached the 28,872 level, the Put/Call ratio on the CBOE had a reading of 0.56, it’s lowest reading since the 26 January 2018 high.  Ten trading days later, the Dow was trading 3,256 points lower! Low P/C rations like these mean that option traders believe that stocks are going to the moon.  They’re almost always wrong!  Stocks don’t go to the moon; they go to targets.  Targets that are defined by patterns and the current pattern suggests the current rally is either complete or nearing completion.  Like I said, the pattern could have topped on Thursday.

If Thursday’s high was the end of Major Wave 5 or the end of the Bull Market, the Dow should begin to work its way down to the 27,325 level, which is where the current rally started.  The reason I say this is because the recent rally has taken the shape of a rising channel or Ending Diagonal and these patterns usually fall to where they began.  Beyond this, we will need to see what happens in any ensuing rally.  If 27,325 does not hold, the next major support level is the 3 October low of 25,743.  In other words, the Dow should decline somewhere between 1,000-3,000 points during the next few months.

As for now, the Dow, SPY, NASDAQ, and Russell 2K remain on Buy Signals.  The Tide and the Dean’s List remain Positive.

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 from last week remain on the Board.  These readings were at or close to the highest readings ever recorded. 

The Sector Ratio fell to 21-3 Positive after yesterday’s session. Students should continue to watch for signs of weakness in the Ratio before becoming aggressive to the shot side. The Strongest Sectors were Energy, Healthcare, Semiconductors, Real Estate, and Utilities.  The three Weak Sectors were Autos, Telecoms, and Transportation.

Because the Sector Ratio continues to remain strong, I remain reluctant to get aggressive on the short side with the Model Portfolio and only have a few ‘trial’ inverse positions working.  Once the Dow begins to break below its lower trend line, near the 28,400 level, the Model will start becoming aggressive to the short side.  To put it another way, as long as the Dow stays above the 28,400 level, it could still make another push toward its recent highs.

Note:  During the past year, I have gained great respect for the Sector Ratio.  It’s proven to be an important part of the Professor’s Methodology. Most recently, the Sector Ratio began to strengthen a few days after the Dow bottomed on 3 October.  It turned 13-11 Positive on 12 October, two days before the DMI turned positive on 15 October to signal the start of the current rally.  The Ratio remained EXTREMELY positive throughout the rally with the Strong Sector List telling us which sectors would lead the way higher.  On 15 October, with a positive DMI, the Strong Sector list was telling us to be in Service, Retail, Semiconductors, and Consumer Products.  How did they do?  Hmmm?

Starting with the semis, mostly because I don’t like stocks in the Service Sector, INTC went from 52 to 60.  MU went from 46 to 56.  Retail favorites, like AMZN and NFLX went from 1767 to 1898 and 267 to 333. Nordstrom (JWN) went from 34 to 41. Best Buy (BBBY) went from 34 to 41.  This is the reason I continue to watch the Sector Ratio and the Sector Lists.  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.

There were NO CHANGES to the Model after yesterday’s session.  The Model continues to hold 1,000 shares of SCO, 1,000 shares of DXD, 300 shares of SQQQ, 500 shares of GDX with a cash balance of $74,167. The Model is currently up 29.2 percent after yesterday’s session.

Friday’s killing of the Iranian general caused Crude Oil prices to spike higher, causing the Model’s ‘trial’ position in SCO, the inverse ETF for crude oil to lose 0.74 cents to 11.4.  While I still believe that crude oil is going lower in the longer term, the current situation in the Persian Gulf could push crude prices even higher during the short-term.  Because of this, the Model will be placing a stop on its position in SCO at the 11.17 level, just under Friday’s low.  

The market timing signals for Gold, the Dollar, Bonds, and Crude Oil remain unchanged. It’s likely that there will be several significant changes to these signals once the equity markets top.

Gold made a big move up on Friday, but the gold miners fell along with the rest of the market.  GLD (gold) was up 1.91 to 145.86 while GDX (the gold miners) was down 0.18 cents to 29.17.  Gold (the metal) appears to have entered its Wave 5 up and should continue to push higher.  If it does, I would expect the miners to follow the price of gold higher, so I continue to look for entry points to add to the Model’s current position.  As of Friday, GDX remains on a VTI Buy Signal with a 2-period RSI approaching oversold conditions (36.7).  If the 2-period RSI moves below 30, I’m a buyer.

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 the current Wave 5 up rally 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.

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

01-06-2020

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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.