Weekend Strategy Review July 5, 2020

Posted by OMS  at July 5th, 2020

The markets rallied hard early Thursday, then fell off for the rest of the day.  The Dow finished with a gain of 92 points, closing at 25,827.  It was up 812 points for the week.  The NASDAQ gained lost 260 points on Thursday and was up 450 points for the week. The disparity I mentioned last week between the Dow and the tech heavy NASDAQ continues. I continue to see large negative divergences in breadth and volume as the markets push higher at the same time Bullish optimism is at or near all-time historic levels.  All this tells me is that the markets are near another major topping point.

That top could have occurred on Thursday.  Thursday’s early rally to 26,204 filled the gap that occurred immediately after the 23 June interim high. Bear market rallies tend to test and fill gaps on their way down. Like I’ve mentioned many times before, the Japanese call this ‘closing the window’.  But now that the ‘window’ has been closed, and the Bullish end-of month and pre-holiday bias is no longer in play, the markets should begin to trade lower.

Thursday’s early rally was accomplished on extremely light volume…. only 81 percent of its 10-day average volume.  While some of this lack of volume is normal for a pre-holiday trading day, I can’t ignore the fact that volume on the NYSE has been running at about 80-86 percent for the past week or so which is EXTREMELY unusual.  Most of the volume is occurring in the FANG stocks, which is masking what’s going on with the overall market.  

From a pattern perspective, the Dow and SPX appear to be in the process of completing Wave 2 up of Major Wave 3 down.  Once Wave 2 up completes, the Dow should begin to fall below the 23,000 level.  My target for Major Wave 3 down is the 22,800 level, but it could go even lower.  Eventually, once all five waves of Wave ‘C’ down are complete, the Dow should be trading below the 18,000 level, with 12,000 -14, 000 possible.

The Head & Shoulders Pattern I talked about last weekend is still alive and well.  All the current Wave 2 rally is doing now is completing the right shoulder of that pattern.  A close below the neckline near the 25,000 level should send stocks reeling.  

The VTI remains a neutral 54.1 after Thursday’s session. But now the 2-period RSI is overbought at 70.53.  With no trend and overbought readings like this, the market is poised for a decline.   

The Market Timing Indicators for the Major Indexes are Positive after Thursday’s session.

The Dean’s List and Tide are Neutral.

The Sector Ratio weakened 14-10 Positive after Thursday’s session.  If you recall, the Ratio strengthened to 24-0 Positive going into Thursday’s session, so the 14-10 number is a major change.  Also, the RS Ratings on the top sectors took a major hit as now only two sectors on the Strong List have ratings above 3.  There rest are mostly 1s and zeros, so the Strong List is weakening…fast.  The top 5 Strongest Sectors were Material, Retail, Computers, Cap Goods, and Household Products.  Household Products are something students should watch closely. When toothpaste and toilet paper move to the top of the List, it’s usually a sign of trouble with the economy.   The top five Weak Sectors were Banks, Leisure, Telecoms, Food, and Energy.

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 if the Dow falls below the 25,000 level. 

Gold and the miners rose on Thursday but pulled back into the close.   GLD finished with a gain of 0.36 cents at 166.98.  Gold remains in a Bullish pattern and appears on track for a rally to the 1,900 level as Wave 3 up unfolds.  On the other hand, it still appears that mining stocks are close to completing wave ‘b’ of a complex Wave 2 pattern that still needs one more leg down to go.  It’s still not clear if the miners are going to follow gold higher or make one more run lower, toward the 220-240 level.  I’m still watching the 260 level on the HUI for a signal.  A break on 260 would be negative for the miners.

I had a nice day on Thursday trading two intraday declines with my Scalp Trading Indicators.  They were both easy trades using DXD, the inverse ETF for the Dow.  The first trade occurred at 10.32 with the last being at the 14.56 mark.  When I say ‘easy’, that’s because I was looking for the Dow to rally to close the ‘gap’ near the 26,100+ level.  So, when the Dow moved above my target early, I started looking for an entry point to fade the market.  That opportunity came at 10.32. The first trade paid for my day…the second trade was a bonus.  The reason I mention this today is because I plan to do the exact same thing next week.  I’ll be looking to trade the downside, taking all negative trades whenever the indicators on the DOW and Russell 2K turn negative. From current levels, I believe there’s a lot of juice in those lemons.

We had several students purchase the Scalp Trading Video this week, so I’ll be doing another follow-on training session next week, probably on Wednesday.  For students who think they need a refresher, drop me an email, and IF I have room, I’ll send you the details with a link to the session.

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.