Weekend Strategy Review July 12, 2020

Posted by OMS  at July 12th, 2020

The markets staged another strong corrective rally on Friday, gaining back all of Thursday’s decline.  The Dow finished with a gain of 369 points, closing at 26,075.  It was up 248 points for the week.  The NASDAQ gained 70 points on Friday and was up 410 points for the week. The disparity I have been talking about for weeks between the NASDAQ and the Dow, SPX, and Russell 2K continues.  I continue to see large negative divergences in breadth and volume.  And while the NASDAQ is being pushed to new highs by a handful of stocks, the other major indexes, like the Dow and SPX are still significantly below their June highs which for the Dow is 2,000 points below its all-time February high of 29,569.  BTW, the Russell 2K is also significantly below its all-time high, which was made two years ago.  These inter market divergences are a sign that overall market is weak, and once the extreme level of speculation on the NASDAQ runs its course, it too will join the other markets in the major down-turn I see coming.

From a pattern perspective, the NASDAQ appears to be completing an Ending Diagonal Pattern. We all know how these patterns end up, as I talked frequently about the Ending Diagonals in the Dow and SPX just prior to the February crash.  The current rally in the NASDAQ Composite started on 27 March at the 6,631 level.  On Friday, the NASDAQ closed at 10,617.  So, because Ending Diagonals tend to decline to where they started, my initial target for the NASDAQ is the 6,631 level…as a minimum.

The Dow, SPX, and to a lesser extent the RUT, are in entirely different patterns than the NASDAQ.  Their patterns suggest that they have already topped and are now working to either complete a minor retracement Wave 2 up or are starting Major Wave 3 down.  If the Dow stays below its 8 June high of 27,580, I MUST assume that it’s in Major Wave 3 down.  Further, because the initial decline from the 8 June high was impulsive (likely Wave 1 down of Major Wave 3 down) I MUST assume that all the up-down-up trading that has taken place since the 15 June low of 24,843 is part of minor retracement wave 2 of Major Wave 3 down.  In other words, one the current retracement wave completes, the next major wave should be Wave 3 of Major Wave 3 down. It should be another crash like wave that drops the Dow below the 23,000 level, with even lower prices likely.  Students should understand that this wave will only be wave 3 of the sequence.  Once all five waves of the sequence are complete, the Dow should be trading below the 18,000 level.  (See attached charts)

On Friday, the VTI on the Dow closed with a reading of 59.1 with a 2-period RSI of 65.84.  So, the Dow is slightly overbought with no trend in place.  The readings are consistent with what you might expect in a minor wave 2 retracement.  

The Market Timing Indicators for the Major Indexes are mixed.  The indicators for the Dow are Neutral while those for the NASDAQ remains Positive.

The Dean’s List and Tide are Neutral.

The Sector Ratio strengthened to 18-6 Positive after Friday’s session.  In a way the number is somewhat misleading as 8 of the 18 strong sectors and 5 of the weak sectors have RS ratings of ‘0’ or ‘1’ so the Ratio could change considerably in the days ahead.  We saw this happen during the week when the Ratio turned slightly negative.  It then turned back to positive the following session.   The takeaway from this discussion is that the Sector Ratio is telling us that the market is in transition.  With so many sectors with 1s or zero RS ratings, it’s likely the current retracement wave is likely close to completing.

The top five strong sectors were Material, Household Products, Autos, Computers and Consumer Products.  The top five weak sectors were Banks, Energy, Real Estate, Service and Semiconductors.  

The Model bought 1,200 shares of TWM on Friday.  TWM is an inverse ETF for the Russell 2K.  I haven’t projected a target for TWM, but the reason it was purchased was because my target for IWM, the positive ETF for the RUT, is below 90.  IWM is currently trading near the 141 level.  I believe small cap stocks will be hit especially hard on the next wave down of this Bear Market.

So now in addition to Friday’s purchase of TWM, the Model continues to hold 1,600 shares of DXD, 400 shares of DUST, and a lot of cash.  It continues to look for opportunities to buy shares of inverse index ETFs.  The Model will become aggressively negative once the Dow falls below the 25,000 level.  This is the level that would confirm (for me) that the Dow is headed below 18,000.

Gold and the miners fell on Friday.  In Thursday’s Comments I mentioned that the HUI had reached its Upper Trend Line and should begin to pull back.  My target for the HUI remains near or below the 240 level.  

Have a great weekend.

That’s what I’m doing,

h

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.