Weekend Strategy Review June 21, 2020

Posted by OMS  at June 21st, 2020

The markets were mixed on Friday.  The Dow finished with a loss of 209 points, closing at 25,871.  It was up 266 points for the week.  The NASDAQ gained 3 points on Friday and was up 357 points for the week. The disparity between the Dow and the tech heavy NASDAQ continues as speculators pour money into the big name FANG stocks with volume that is swamping what’s happening on the NYSE.  BTW, volume on the NYSE has been running at less than 70 percent of its 10-day average for the past week, which is a major warning. Reminds me of what was happening back in 2001, just before dot.com bubble burst.

To tell the truth, I’m not sure what Friday’s decline on the Dow was all about.  Like I said on Wednesday, there are two scenarios on the Board now.  The first suggests higher prices, possibly retesting the 26,661 level. The second suggests the Dow has already seen its Wave 2 top and is about to start Wave 3 down with significantly lower prices ahead. If you look at the short-term bars, it’s possible that wave 1 down (15 June) and 2 up (16 June) of the next major wave down are already in. The 16 June high of 26,611 could have been the ‘retest’ of the 26,611 level I was expecting.  We’ll know for sure next week.

One of the things that has me concerned now has do with the overnight market.  If you have been trading this past week or so, you probably noticed that most or all the advance or decline for the day has been overnight.  For example, on 16, 17, and 19 June, the opening was close to the high or low of the day.  There wasn’t much action after the open, making it tough for traders, even scalp traders like me.  I remember this same thing happening back in 2007 as Wave 2 up was developing.  I kept waiting and waiting for the big decline, thinking that Wave 3 down would never start, even though the patterns and indicators suggested stocks were poised for a major decline.  I see the exact same thing happening now.  Friday’s decline on the Dow stopped at the bottom of a major trendline, a trendline that goes back to the 23 March (Wave 1 down) low.  The second touch of the trendline was the 14 May (Wave B down) low.  So, if prices begin to break below Friday’s close of 25,871 on Monday, Wave 3 down could be underway.

Friday was a triple witching options expiration day.  Typically, the market does not move much on day’s like this, as the institutions try to keep prices relatively stable, so they can keep all the options premium on the stocks and indexes they sold.  This tends to distort the price action that should have happened on Friday.  In other words, Friday’s 209 point decline could have been a lot worse.  So, we could see a large decline on Monday. There’s history behind these triple witching sessions going back to the last major market crash that shows the market is about twice as likely to close lower the following week.  So, if the market starts out lower on Monday, the possibility of a trendline break and the history of a lower prices after a triple witching session could make for an ugly week.

There’s another thing I want to talk about today and that’s having pre-conceived notions.  This cost me Big Time on Friday. As you know, I’ve been avoiding the indexes this past week or so and focusing on shorting gold.  That’s because gold had a much clearer pattern (down), at least over the short-term.  Anyhow, during the follow-on scalp trading session I had on Thursday, I told students that I would be taking ALL scalp trades on DUST (long) and GDX (short) whenever the scalp trading indicators gave say so. This was the strategy I had been using for the past week that made every day of the past week profitable. So, when I saw gold moving higher out of the gate on Friday, I stayed on the sidelines.  I had the pre-conceived notion that I was only going to short gold, so I stayed out of the trade, even though my indicators were screaming “GO LONG!”  What a mistake!  Turns out the HUI decided to re-test its upper trendline to form Wave B of its downward sloping pattern, a pattern that should still take it to the 220-240 level.  But because I had a pre-conceived notion, supported by the fact that the HUI had broken below the 260 level, it would go straight down.  I should have known better.  Nothing that happens in a Wave 2 is ever straight down or up.  So, I missed the obvious trade. As things turned out I did manage to take the short trade that occurred in the late afternoon, so I did get paid.  But IF I didn’t have that pre-conceived notion at the start of the day and just trusted the indicators, Friday could have been another BIG DAY for me.  Moral of the Story:  Don’t let this happen to you.  Leave your pre-conceived notions at the door.  Trade what you see, not what you think.  Let the market and the indicators tell you what to do.  There’s too much emotion built into what you think, so don’t listen to your thoughts when you trade.  Trust and trade your indicators!

The Market Timing Indicators for the Major Indexes are mixed.  The timing indicator for the Dow has turned Neutral while the same indicator on the NASDAQ remains Positive.

The Dean’s List remains Positive while the Tide remains neutral.  

The Sector Ratio declined slightly on Friday and is now 22-2 Positive.  The top 5 strongest Sectors were Energy, Material, Cap Goods, Retail, and Media.  The two weak sectors are Telecoms and Semiconductors.  

The Model continues to hold 400 shares of DUST and a lot of cash.  It continues to look for opportunities to buy shares of inverse index ETFs and now SCO, the inverse ETF for Crude Oil.  These purchases could begin within the next few days, especially if the Dow starts to decline below Friday’s close.

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.

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.