Weekend Strategy Review May 2, 2021

Posted by OMS  at May 2nd, 2021

For the past10 trading days, the markets have been trading within a sideways triangle for sub-wave 4 of Wave 5 up.  The Dow and S&P appear to have made their sub-wave 3 high on 16 April and everything since has been part of sub-wave 4.  This sideways triangle can be clearly seen on a 15 minute chart of the Dow.  So, even though three FAANG stocks (AAPL, Amazon, and Facebook) plus Microsoft and Tesla delivered blockbuster earnings during the week, the Dow still ended the week with a loss of 169 points.  Same thing happened on the NASDAQ where several of these large cap tech stocks are traded…a loss of 120 points.  The S&P also finished down 30 points for the week.  Pretty incredible when you think about it.  If I were on the moon without a newspaper or the internet, I would have guessed the markets would have rallied 3-4 percent with earnings like this.  Instead, they lost money.

We saw this in several other stocks too, as former top 5 stock First Solar (FSLR) announced earnings of $1.96 per share vs. 0.99 expected on Friday but then proceeded to shed 10.76 points. Hmm?  Most people probably thought it would have gained 11 points with that news.  Yet the stock fell hard.  If you looked at the recent pattern on FSLR, which is a classic inverse Hockey Stick, the decline was not unexpected.  Patterns usually don’t lie.  They might take more time to develop, which frustrates traders, but at the end of the day, what a pattern predicts usually occurs.

This is the reason why I want my students to look at a few patterns this weekend as they try to analyze what will happen to the markets I the weeks ahead. Remember, the current market was led higher by a handful of stocks.  Stocks like TSLA, Netflix (NFLX), and the FAANGS.  During the past year, whenever these stocks announced even mediocre earnings, like Apple did on 29 October, the stock rose from 112 to 145.  But this week we saw something different.  Now, not even a 50-100 percent increase in earnings is enough to move the stock higher.  So, what’s driving stock prices?  Is it the earnings or is it the pattern?  This is the reason I want students to look at the patterns on TSLA, NFLX, AAPL, and others this weekend.  The things that’s noteworthy is that all these over-hyped stocks are currently developing major inverse Hockey Stick Patterns.

For example, take a stock like TSLA.  It reached a high of 900.4 on 25 January.  In the two months that followed, it declined to a low of 539.49 on 5 March.  The decline was Wave 1 down.  A few weeks later, I said the stock would likely rally off that low to the 740 level as it developed its Wave 2 retracement.  The stock got as high as 780.79 on 14 March before pulling back. On Friday, TSLA closed at 709.44.  Right now, the ST Indicators on TSLA are positive, so the stock is either still in its Wave 2 retracement OR in minor wave 2 up of Wave 3 down.  The thing to note about TSLA is that it is no longer in a Bullish pattern.  Since it made its high on 25 January, the stock has been in a Bearish pattern, making lower lows and lower highs.  The next time the ST indicators turn negative, it’s likely that TSLA will start a decline that will test its March low of 539.  If it breaks this low, the pattern suggests a move to the 420 level.  If this happens, it will be more than a 50 percent decline in the stock.  That’s a crash by anyone’s definition.   That’s why I want students to look at the inverse Hockey Stick Patterns in the other large cap tech stocks this weekend.  They are all forming similar patterns!  Some like NFLX are more advanced than others.  But they are all inverse Hockey Sticks, so please be careful.  BTW, if NFLX breaks below 500, which is where its 200-day moving average is located, watch out below.  There is NO real support below 500 for the stock until you get to the 400 level.

Again, I’m talking about patterns this weekend because I believe this is what drives stock prices.  Patterns are driven by investor sentiment, not earnings.  When sentiment is positive, stock prices usually push higher.  Then once investor optimism reaches a peak, like it is now, even spectacular earnings from the most popular companies can’t move prices higher.  Instead, prices consolidate…which causes a wave 4 to form.

Then once wave 4 completes, it’s likely that final wave 5 up will push prices toward my target of 34,500-34,700 on the Dow.  Students should watch for a break of 340.85 on the DIA, which is where the upper boundary line of the triangle is located.   Once this breakout occurs, prices should move quickly to the target levels.  A break of last week’s low (20 April) of 336.75 will void the pattern.

Students should pay attention to both the patterns and indicators next week.

The Dean’s List remains Positive. The Tide has turned Negative.  It is not unusual to see the Tide and Dean’s List in conflict during a sideways wave 4.

The Sector Ratio remained at 22-2 Positive after Friday’s session. The top 5 strong sectors were Service, Retail, Autos, Material and Financial.  The two weak sectors were Semiconductors and PharmaBio.  Continue to look for changes to the Sector Ratio as the week progresses.

Model Update:   There were NO Changes to the Model.  It remains 100 percent in cash.

Top Stocks:  In the training webinar I did last night, I showed several new and returning students how to use the ‘trigger’ on the DIA with the Top Stocks on the MWL.  As I have been doing since last summer, when I first demonstrated this Top Stock Rotation Strategy, I showed what happened to the Top Stocks for the past three ‘trigger’ events.  Once again…if you followed the rules and only picked stocks that were in up trends, there were nothing but winners.  A link to the video will be available to everyone that purchased the Scalp Training Class once I figure out a way to get the video file to Dave.  So far, my efforts using Drop Box have been unsuccessful.  That’s my project for this morning.

BTW, the video also contains several updated charts for the major indexes.  These charts, especially the hourly chart of the Dow (DIA), shows the classic wave 4 triangle that has been forming during the past 10 trading days.  Again, triangles are important because prices almost always leave the triangle in the direction they entered the pattern.  In this case, it’s up.

Gold:  No change to the Comments I posted during the week and in last week’s WSR.  I’m still avoiding gold for now.  The 3-3-5 flat corrective pattern on GLD may have end with the 21 April high.  If so, the next major leg down is underway. Right now, the Market Timing indicators are Neutral.  If they turn Negative, I will start looking to short gold.

Bonds:   Same for Bonds.  The ST indicators on Bonds remain Positive, but I’m still avoiding Bonds for now.   I still believe that the recent rally is associated with a retracement wave 4 up.  Once this wave completes, Bonds should fall below their 18 March low.

Have a great weekend.

That’s what I’m doing.

h

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.

Market Signals for

05-03-2021

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.

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