Weekend Strategy Review June 14, 2020
Posted by OMS at June 14th, 2020
The markets rebounded on Friday after Thursday’s 1,861 point loss in the Dow. The large cap index finished with gain of 477 points at 25,606, after retracing about half of Thursday’s loss. The Dow reached a high of 25,966 during Friday’s retracement. It was down 1,505 points for the week. The NASDAQ gained 96 points on Friday and was down 255 points for the week.
Friday’s rally appeared to be wave ‘a’ up of an a-b-c retracement pattern for Wave 2 up. As I mentioned in Friday’s early comments, the retracement should complete somewhere between the 26,000 – 26,300 level. Then once Wave 2 completes, the next wave down, which should be impulsive Wave 3 down, should remove several thousand points off the Dow. By the time all five waves of the decline are complete, the Dow should be trading below the 18,000 level, possibly significantly lower.
Late Friday, I saw several cluster buy programs kick in between the 3,020 to 3,040 level on the S&P. This same thing happened about two weeks ago, which tells me the institutions are prepared to defend the level surrounding SPX 3,000. This level also happens to be where the both the 200 and 500 day moving averages are on the SPX (2,961 and 2,963). So, from a technical perspective, these levels MUST be watched closely, as a break below 2,961 would put the S&P in a crash mode. Not good, especially when there is a developing Wave C Bearish pattern that projects significantly lower prices. This is the reason why the institutions…the smart money, are watching and defending the 200 now. They know what it means for a market to be trading below its 200. Bad things can and do happen. I talk about this all the time in my classes. You never want to be seriously long a market that is trading below its 200-day moving average. Scalp trades are OK, but otherwise… Never! I don’t care what your financial advisor, or Cramer, or the folks on CNBC say. I’m saying that BAD things can and do happen when a market begins to break below its 200-day moving average, especially on the second break.
The Market Timing Indicators for the Major Indexes are mixed. The Dow is Negative while the NASDAQ is Neutral.
The Dean’s List and The Tide have turned Positive after turning Neutral on Thursday.
The Sector Ratio stayed at 24-0 Positive after Friday’s session. The top 5 strongest Sectors were Energy, Leisure, Autos, Retail, and Materials. Students should note that the Material Sector, which includes gold, has dropped from the top of the List to the #5 position. The apparent weakening in gold is one of the reasons I bought a few shares of DUST for the Model on Friday. The charts suggest that gold is beginning a wave 2 down of a five wave sequence that should take it significantly higher in the years ahead. But before this can happen, it probably needs to trade lower. The pattern on the HUI, the gold miners index, suggests it could trade down to the 220-240 level before wave 2 down completes. On Friday, the HUI closed at 262.01.
BTW, I had another nice day scalping DUST on Friday generating a little over $600. The new scalp trading indicators make this easy to do. I was using a 2-day 4 minute set up and took all positive trades (remember DUST is an 2x leveraged inverse ETF), so when gold falls, DUST rises. This is the way I am trading the current Bear Market. Rather than worry about what the Dow or NASDAQ are going to do as they trace out their corrective waves in an unclear pattern, I’m focusing on gold which has a much clearer pattern. Once I see that the Dow completes its retracement, I’ll start focusing on the indexes. Not now.
Bonds rebounded during the week but fell on Friday as equities rallied. For the past few weeks, Bonds have been tracking inverse equities. I expect this will continue for a while longer. But students should realize that this inverse correlation with equities doesn’t always hold. Sometimes Bonds and stocks rise or fall together. We saw the happen in March when BOTH bonds and stocks fell. Then later in mid-March when the Wave 5 rally began, BOTH bonds and stocks rose together. The point I’m trying to make here is that it’s possible, even likely, that once the market begins to decline, there may be NO PLACE TO HIDE!
Same for some of the high dividend yielding stock and bond ETFs. I’m seeing a lot of my ‘financial advisor’ friends touting some of these ETFs because they are paying dividends averaging near 3 percent. Hmmm? This is something students, especially my senior students, should think about because what good is getting a 3 percent yield if you could lose 50+ percent of your principal?
This week should be about preparation. I want you to think about how you’re going ride out the next leg down of the current Bear Market. I want you to spend some time looking at the indexes and note how close they are to their 200-day moving averages. Then I want you to go back and look at the Bear Markets of 2001-2002, and 2007-2008 and see what happened once the Dow, NASDAQ, and S&P began to trade below their 200s. It’s not pretty. BTW, the 200 on the Dow is 25,656. Write that number down. The 50 is at 24,931. So, the 50 is already below the 200! It doesn’t have to fall below the 200…it’s already there! In other words, by definition, the Dow is already in a down trend! If you’re still thinking about trading the long side of this market, you’re bucking the tide. That’s NOT what the big boys are doing. In a week or so, once the current retracement rally completes, they’re going to be trading with the tide. They’re going to be major sellers.
BTW, last week, I mentioned that once the decline starts, it will be swift. Like Thursday’s decline of 1,862 points swift. Now I’m telling you that once the current Wave 2 retracement wave completes, …once the Dow falls below its 200, the next move down, Wave 3 down will re-define swiftness. So, think about what happened on Thursday. Those low P/C ratios are still there. Like I keep saying, the signals they give can be early…but there almost NEVER wrong! (I’ve only gone back about 30 years, so I’m using the qualifying term ‘almost’)
The Model bought 400 shares of DUST on Friday at a cost of 31.65 per share. The purchase is playing mining stocks to decline over the next few weeks, with a target near the 220-240 level on the HUI. If the Dow rallies back to the 26,000 level, the Model will look to establish positions in inverse index ETFs.
That’s what I’m doing,
h
Market Signals for
06-15-2020
DMI (DIA) | NEG |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 11 Jun 2020 |
NASDAQ | NEU | 11 Jun 2020 |
GOLD | NEU | 03 Jun 2020 |
U.S. DOLLAR | NEG | 03 Jun 2020 |
BONDS | NEU | 11 Jun 2020 |
CRUDE OIL | NEG | 11 Jun 2020 |
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.
Category: Professor's Comments, Weekend Strategy Review