Weekend Strategy Review March 22, 2020
Posted by OMS at March 22nd, 2020
Wow, what a week. After being up 444 points early Friday, the Dow pulled back to close 913 points down, closing at 19,174. It was down 4,011 points, the worst weekly decline ever. It was more than twice the weekly declines experienced in the market crashes of 2001-2002 (-1,369 points on 21 September 2001) and 2008 (-1,874 points on 10 October 2008). Everything got hammered, even gold (GLD) which is usually perceived as a safe haven.
But that’s NOT what I want to talk about today. Enough about being negative. What has happened is now behind us. It’s history. As Shakespeare wrote in The Tempest, “The past is prologue, the future is still to be written.” If you paid attention to the indicators and got out of the market on 18 February, you would have avoided a loss of over 10,000 Dow points. That’s history. But now that the Dow is 10,000 points lower, I want you to focus on the future.
The decline down to 19,174 on the Dow was predicted by Elliott Wave analysis. Actually, the wave analysis predicted a decline to 21,700. The rest of the decline was due to fear and panic. Elliott waves are generated by investor sentiment and psychology. The waves are the sum of how investors across the world feel and think about the market. It’s these feelings and thoughts that generate reliable patterns that technicians use to predict what the market will do in the future. One of these patterns is the Ending Diagonal. It has been with us for decades. It’s one of the first patterns that Ralph Elliott studied in the 1920 before he came out with his theory in the 30s. It has predicted every market crash since. The Ending Diagonal that started in December 2018 is what predicted the decline to 21,700. All this is prologue.
So now that the Dow has plunged over 10,000 points, what’s likely gonna happen now? Hmm? What would a guy who has been dead for over 72 years have to say about the market now? Well…he would say that at some point, probably sooner than you expect, the market will bounce. Friday’s low could have been the bottom. We’ll see. The reason I say this is because by breaking below the 20,000 level, Wave 4 down is likely complete. Now we’re now working on Wave 5 of Major Wave 1 down. It’s possible that Wave 5 down could have a bit more downside to go, maybe to the 17,000-18,000 level. But it’s also possible that it could be completing soon. The lows of the past three days have been 18,917, 19,177 and Friday’s low of 19,092. So, each day the Dow has fallen to the low and then bounced. This is the type of action that slows the momentum indicators and causes the positive divergence I’m beginning to see.
I’m not saying that a bottom is in yet. All I’m saying is that we could be getting close. Here’s the thing: In the above paragraphs, I talked about investor sentiment and feelings. When investors believe the coronavirus is causing the sky to fall, they panic. But if you look at the market’s reaction during the past three days as it has traded down to the lows, we began to hear some positive news about various drugs and treatments for the virus. One of these treatments is the malaria drug being used in France. I have no idea if the reports about the drug curing 100 patients is true or not. But what I do know is that it has provided a modicum of hope for people around the world. This is what is causing the downward sloping momentum indicators to slow.
So, if the rumor proves to be true, and the rate of new cases begins to slow, it’s likely that a rally of significance could be in our future. How much rally? Hmmm? Well, let’s get back to what Mr. Elliott would say. He not only told us that the market moves up in a five-wave pattern, like it did as it formed the Ending Diagonal, he also said that once the 5-waves are complete, a new Bearish sequence begins. This is where we are now. Elliott would have us label the Bearish decline as A-B-C down. So technically, the move down from 29,500 to current levels is really all part of Major Wave ‘A’ down. Let’s not worry about the labeling for now. The part that’s important is the next wave up or the retracement. Once the current decline completes, the obvious question is how much will the Dow rally? Again, hmmm? Well, the two most likely points are 38 and 50 percent. At this point, with almost $12 Trillion being removed from the markets, I wouldn’t place too much money on a 62 percent retracement, which is the third retracement level for Elliott Wave analysis.
So, let’s say the Dow bottoms somewhere between 18,000-19,000, or just over 10,000 Dow points from its 12 February top. If we use 19,000 as the bottom, a 38 percent retracement would take it back to the 22, 800 level. A 50 percent retracement would have the Dow moving to 24,000. This is the target level for Major Wave 2 up (or Major Wave ‘B’ up if you want to be technically correct) I have been talking about for the past few weeks.
OK, so IF the market begins to stabilize next week, what will I be looking to trade. Well, as most of you know, I love to trade energy in March-April. I talk about the reasons for this in every class. It’s now mid-March. Energy stock have been hammered. A stock like British Petroleum (BP) was at 40 just a few months ago. This week it was at 16. Kinder Morgan (KMI) was at 22+ just before the crash started. Last week during the panic, it was below 10. Here’s the thing I want you to think about this weekend. Is the world really coming to an end? Are we never again to go outside and do the things we love to do, like fish, shop, or play with grand kids? God help us if that is the case. I don’t think so. But assets like the ones Kinder or BP owns, the 83,000 miles of pipelines, the 147 terminals, thousands of gas stations, storage tanks, etc. are being priced like they never will be used again. Ever! Do you really believe this?
Richard Kinder, one of the wisest oil men in the country doesn’t believe it. The ex-chairman and founder of Kinder Morgan recently bought a ton of the company’s stock at prices between $18-$20 per share. He now owns about 11 percent of the shares. Heck, if he thinks $20 is a fair price to pay for the assets, I’m OK with $11-$13. That’s a 40 percent reduction from what one of the smartest people I know was happy to pay. It’s just like me going to buy a fishing shirt at Bealls. It’s on sale!!!!
Same for many of the other energy related stocks I like to trade, like BP, EOG (love their technology), CVX, XOM, maybe even OXY and SLB. None of these stocks are recommendations. I don’t make recommendations. These are only some of the stocks I trade for my own personal accounts. Forget the dividends, even though companies like CVX and XOM are paying close to 9-10 percent. OXY and SLB are currently showing losses in earnings, so I’m always concerned whenever a good company shows losses, even temporary losses. But are they going to go out of business? I don’t think so. The way I approach dividends is it’s great If you get them. I NEVER buy a company just for its dividends. That’s a fool’s game. It’s something a financial advisor or a broker would tell you is a good thing. I’m NOT that guy. I know that when times get tough, like they are now, the dividend is likely to go away or as a minimum be reduced. When this happens, the stock price will likely get hit even more. So, when you’re thinking about the market this weekend, you might want to focus on a few energy stocks that are ‘ON SALE’. If you don’t know how to price them, just go to Yahoo Finance and check to see what prices some of the insiders are buying at. Insider buying is ALWAYS something I like to see when I’m investigating a stock to purchase. Not so much with sales, as the insiders could be selling shares for any reason, a daughter’s wedding, house purchase, etc. Look for companies trading below prices the insiders paid. Then look at the indicators. Look for divergences on the momentum indicators (short-term CCI, MACD, etc.) on the daily and 60 min charts. Then use the 5s and 15s to pull the trigger.
Again…it’s March! I LOVE to trade energy in March-April.
Have a great weekend.
That’s what I’m doing,
BTW, are their any techies out there that know about setting up conference calls or chat rooms? I’d love to talk with you if you know about these things. What I’m looking to do is have a chat room that my students can go to during the day, to talk about things. Nothing formal, but I figured if I was out back trading and smoking a cigar on my porch, I’d love to hear what you’re doing and show you a few things I’m trading. This corona virus thing has us all cooped up like chickens, and it’s time we had something else to do besides watching every governor in the country tell us what’s going on in his state. Hey, it all the same. I don’t need to know what’s happening in NY, CT or CA. The great folks at ActionNewsJax (channels 30 and 47 on Direct TV), tell me everything I need to know about what’s happening with the virus in Jacksonville, Florida. And they get me up to date after watching for about 5 minutes. After that, I need something else to do, like making money. So, if you feel the same way and would like to explore something like this, please let me know. Send me your ideas/interest and we’ll see if we can make something happen. With corona closing the schools, I’m not likely to have classes for a while. So maybe we can huddle together on-line, talk about the things that are important to us, and learn from each other.
Market Signals for
|DOW||NEG||24 Feb 2020|
|NASDAQ||NEG||24 Feb 2020|
|GOLD||NEG||18 Mar 2020|
|U.S. DOLLAR||POS||18 Mar 2020|
|BONDS||NEU||20 Mar 2020|
|CRUDE OIL||NEG||24 Feb 2020|
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.