Weekend Strategy Review March 15, 2020

Posted by OMS  at March 15th, 2020

The markets staged a strong rally yesterday, with the Dow gaining 1,985 points to close at 23,186.  But despite yesterday’s 9.4 percent gain, the Dow was still down 10.4 percent for the week.  The NASDAQ finished up 673 points on Friday, but down 700 points for the week.  It was another wild week!

In Friday’s premarket session, the Dow was down over 500 points before the futures turned around to open almost 500 points positive.  This initial overnight decline was important to note, because with the Dow dropping below 21,700, my target for Wave 3 down, the Dow cash reached an overnight low near 20,785 which is close to my target to complete the five wave sequence.  In other words, there’s a possibility that Major Wave 1 down completed early Friday, which means two things:

Firstly, Friday’s rally was all or part of Major Wave 2 up. If you look at the shape of the rally, it had the a-b-c characteristics of a Wave 2.  The early rally (wave ‘a’) was short and complex, while the afternoon rally (wave ‘c’) was long and impulsive.  So, there’s a good change that it was a wave 2 instead of a wave 4.  If this is the case….

We could see another major decline start next week.  This decline would be a major wave 3 down causing prices to move significantly lower.  If prices don’t completely break down in a major plunge, they should as a minimum, trace out the final waves of the 5 wave sequence for Major Wave 1 down.  In other words, the decline is probably not over yet.  Friday’s rally was NOT driven by new buying.  It was mostly a result of short-covering, and that’s NOT what I want to see before I even think about moving to the long side.  As a minimum, I need to see a retest of Friday’s lows.

Here’s why: During the past few sessions, I heard a lot of commentators talking about ‘bargains. They were saying maybe investors should start taking a few bucks and buy some ‘good’ stocks now that their prices have been cut significantly.  Hmmm?  I don’t know about you, but I heard the same thing from Jim Cramer back in 2008, when he talked about the bank stocks and Bear Stearns. I remember him pounding the table on Bear Stearns and other bank stocks, like Lehman, when they were down 25 percent. He got louder when they were down 50 percent.  His table pounding reached extreme level when they were down 70 percent…buy, buy, BUY!!!  But then when Bear was down over 80 percent, he stopped pounding and told people to sell!   Bear and many of the stocks he was touting all during the decline went out of business.  There was a reason for this.  The business model changed.  Cramer and most of his fellow commentators didn’t recognize what was happening.  What worked for banks stocks prior to 2007 changed completely after the financial crisis hit.  So, what appeared to be a bargain at a 50 percent lower price was not.  It was a dog…. a trap!  

I’m seeing this same thing now.  Take Royal Caribbean (RCL) for example.  You all know that I’ve loved Royal for years.  I paid for my cruises on Celebrity, owned by RCL, by buying RCL every time the DMI turned positive and selling when it went negative.  You know this. As I talk about it in every one of my classes. Celebrity’s ships were and continue to be beautiful! Two months ago, Royal was sailing along at 135.  Their ships were full of happy seniors, like me.  Then Corona struck!  It was like the Titanic hitting the iceberg. All of a sudden, nobody wanted to cruise anymore. People started to cancel their cruises, asking for their money back.  The stock price fell from 135 to 28.61 on Friday.  Wow!!!  What a bargain…right?  Hey. if you liked Royal at 135, you should love it at 30?  Hmmm?  That logic would seem reasonable if I didn’t remember what happened in 2007-2009.  If the conditions that caused Royal to move to 135 were the same, Royal should be an absolute bargain at 30.  But that’s not the case.

Before Corona, Royal was acting like any other good company. They saw a demographic group (seniors) with lots of time and money on their hands, so they built beautiful ships to take them cruising all over the world. Business was good driving to stock price to new highs.  So, they borrowed over $8 Billion and ordered even more beautiful ships.  Then disaster struck.  Seniors, RCL’s main demographic, were the most at-risk group for Corona.  They canceled their cruises and demanded refunds. Hey, the government was telling them not to travel. But Royal only had about $100 to $150 Million on hand, so they were in trouble. They didn’t have the money. They had to pay interest on the $8 Billion in loans and make progress payments on the new ships they were building at a time when the revenue from passengers was drying up.  What a nightmare!  The cash flow situation was very similar to what the banks faced back in 2007-2008.  The enormous debt, which seemed like a good idea before Corona was now a major problem.

So what I’m telling you is that even though the price of RCL is now hovering near 30-32, until we know the full extent of how the Coronavirus will impact the mindset of future cruisers, we simply don’t know if RCL is a buy or not at current prices.  If the virus gets worse and senior cruisers continue to shun the confined spaces of cruise ships, the price of RCL could go a lot lower.  Without a positive cash flow, the company could face bankruptcy. Just like what happened with Bear Stearns and Lehman.  Right now, the DMI on RCL is still negative.  Remember, it turned negative on 24 January at 126.5.  So, IF you’re going to place a long term bet on RCL, you might want to hold off until the indicators turn positive.

Same logic applies to the airline stocks and many other stocks.  A year ago, American Airlines (AAI) was trading in the mid-302.  On Friday it closed at 14.31. American and many other airlines rely on large debt to buy their planes.  Now, with the government shutting down many of foreign routes and the public cutting down on domestic travel, the airlines are going to have a tough time of it.  

One final note:  These are tough times and we don’t know how bad things are going to get.  I just got back from Publix and seeing all those empty shelves reminded me of my trips to the Ukraine many years ago.  Back then, the lack of supplies and the sanitary conditions were so bad in the hotel, the embassy people told me not to take showers! Forget about washing your hands, even the water was polluted!   Toilet paper in the hotel was rationed.  You had to turn in your empty spool to get one that was half filled.  Really!!! But people survived.  We will too.  Corona is only a virus. We’re too strong a nation to let it impact us for long.  

Here’s another thing to consider:  The Dow reached a top on 12 February at the 29,568 level.  Friday, 12 February was a Wednesday.  The following Monday, 18 February, the DMI on the Dow turned negative with the Dow at 29,238, which as only about 300 points from the top.  Prior to the 12 February high, we saw patterns, breadth, and sentiment readings that were showing extreme levels of divergence.  They were screaming at us that a major decline was coming.  So now, prices have fallen and we’re in a Bear Market.   The odds are that this Bear is only beginning. Yes, there will be rallies, mostly driven by news and short covering.  But as of Friday, over $10 Trillion has been removed from the U.S. economy.  Recall that after the 2007-2008 crash, the Fed injected about $4 Trillion into the economy during its four QE efforts to stimulate the economy.  Now, in less than a month, $10 Trillion has been removed. So just as the $4 Trillion was a very effective stimulant, the removal of over $10 Trillion is going to be a major drag. What I’m telling you is don’t expect stocks to bounce back anytime soon. 

As I’ve been saying for the past 12 years, follow the DMI.  Right now, the DMI is negative, so don’t be in a rush to buy the so called ‘bargains.  Keep your powder dry and sleep well. The time will come to be aggressive buyers, but that time is NOT now.

The Sector Ratio remains at 2-22 Negative, which tells me to cool my jets.   

The Model Portfolio remains heavily invested in cash.  Except for a few shares of UCO, which I believe has a lot of upside potential, it’s not holding any stocks now.  Next week, IF the Dow begins to break down, I will be looking to scalp trade the move using a few inverse ETF, like DXD and SDOW.  I won’t be holding these positions overnight.

Because of the increased market volatility, I’m mostly in cash now in my own personal accounts.  I’m only doing short-term scalps with few exceptions.  One of those exceptions occurred late Thursday. Just before the market closed, I saw that we were going to have two consecutive 90+ percent down volume days (95 and 98 percent). This is an almost automatic buy, as history suggests the market will trade higher the next day.  So, I bought a few shares of RCL near 30 and held them overnight.  Ordinarily, I would not do this, but with two 90+ percent down days, I thought the odds were high for a bounce. The next day, RCL opened at 37.01. I immediately sold my position taking a profit of over 7 points. Within 10 minutes, RCL was back down to 30. So, unless you’re on the top of your game, and paying attention to your computer ALL THE TIME, this is NOT a good time to be trading. The conditions are way to hazardous, even for a seasoned trader like me. If I wasn’t paying attention to the computer on Friday, I would have given back the profit in minutes.

So, take some time to reflect on what I said in the above paragraphs this weekend.  Things will settle down.  IF you want to trade next week, look for rallies and then fade them with scalps.  We’re in a Bear Market!  I’m using a short-term CCI as my momentum indicator with a standard VZO.  I’m also using a 3-period RSI to identify oversold and overbought conditions.  So, If the 15s are negative, I’m entering the trades when I see (1) divergence on the 1-minute bars.  I absolutely MUST see divergence on the 1s.  No divergence; no trade…no matter what. Then IF I see divergence, (2) I take the trade on the 1s when the VXO and CCI give the signal.  Remember, when I’m using the 1s as my time period, I MUST have high cover from the 15s.  You can use the same technique using the 5s or the 15s, but then you MUST have high cover from the 60s.

IF I’m in a trade, I watch the 3-period RSI and the VZO on the 1s to tell me when to take profit.  If the CCI and VZO stay positive on the retracement, I’ll re-enter the trade when the 3-period RSI becomes oversold.

That’s what I’m doing.  I don’t know about you, but I’m having a great time trading these volatile conditions.

I have a few charts that I want to show you, but they will have to wait for tomorrow. 

Like I said, try to relax this weekend,

I’m posting two short-term charts for the Dow (DIA) today. Both have lower outcomes.

The first is the Wave 3 down scenario I have been talking about all week. In this scenario, all five waves of Wave 3 down were completed on Friday and Wave 4 up is under way. If this scenario is occurring, the Dow should chop around between 21,000 to 24,500 for the next week or so as it forms a triangle. Then once the triangle completes, the Dow should fall to the 19,000 – 20,000 level to complete Wave 5 down of Major Wave 1 down.

The second chart shows a slightly different scenario. This is the scenario I discussed in the WSR after seeing Friday’s a-b-c rally. BTW, this a-b-c rally can not be seen on the Daily chart as it happened intraday on Friday. I’m calling this the Wave 2 scenario.

Under this scenario, once Wave 2 up completes early next week, perhaps even on Monday, the Dow should begin to decline in another impulse wave. This decline could be as much as 4,000 to 5,000 Dow points from current levels, maybe more of panic sets in. A move down to the 17,000 to 18,000 level is not only possible under this scenario, the charts suggest it’s likely.

In other words, from current levels (23,185), there’s about 1,300 points of potential upside gain vs. a potential loss of another 6,185 points before Wave 3 down bottoms under the Wave 2 scenario. I don’t like those odds. This is not something to fool with.

Just remember that when the Dow was at 29,500, the Ending Diagonal predicted a move down to the 21,700 level. So as we examine the charts this weekend, we have two patterns that suggest significantly lower prices; one that could begin next week, and one that could take another few weeks to develop.

I’m also including a chart of gold (GLD) in the package. Gold has had a nice rally since Major Wave 4 completed in mid-December. The current rally is likely part of Wave 5 up. The reason why I want to talk about gold today is because wave 5s in the metals are usually the strongest wave. Most other commodities and equities have their impulse wave during wave 3s. But for some reason, maybe because a lot of investors buy gold when there is panic in equities, it is not unusual to see large, impulsive moves in gold during a wave 5. So IF this is happening now, the 5 wave rally since mid-December in gold could be Wave 1 of a Major five wave sequence that takes gold significantly higher. The pullback we’ve see during the past 4 days could be part or all of Wave 2 down in that 5-wave sequence. So IF the short-term indicators on gold begin to turn positive this week, the Model will be establishing a position in gold and a few mining ETFs. I’m always looking for trades when I believe they could be a Wave 3.

Protect yourself.

That’s what I’m doing,

h

Market Signals for

03-16-2020

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.