Weekend Strategy Review May 3, 2020
Posted by OMS at May 3rd, 2020
The markets fell hard on Friday on Friday on weak breadth and volume. The Dow finished 622 points lower, closing at 23,724. It was down 52 points for the week. The NASDAQ was down 285 points on Friday and down 30 points for the week.
Friday’s decline broke through an important trend line on the Dow and NASDAQ which means the Major Wave B retracement rally that started on 24 March is likely over. The decline caused the Market Timing indicators on the major indexes to turn Neutral. If the markets continue to decline early next week, it’s likely these timing indicators will generate new sell signals.
Friday was a 90 percent down day for the markets with 90 percent of the breadth and 90 percent of the volume occurring to the downside. This is the type of market action usually associated with the start of a large impulsive move down.
If you look at the retracement rally closely, it tends to mirror the large Ending Diagonal pattern that formed on the Dow just prior to the crash that started in early February. This large Ending Diagonal pattern had a target of 21,700, which was the December 2018 low or where the pattern began. The Dow eventually got as low as 18,214, which I label as Wave A down. So now, with the retracement rally having formed another Ending Diagonal Pattern, the first target of the next decline becomes the 18,214 level. Remember, Ending Diagonals almost always fall to where they began. But just as the large Ending Diagonal Pattern fell below its target of 21,700, I believe the odds are high that the smaller retracement Ending Diagonal will decline well below 18,214, with 12,000-14,000 possible. Major Wave C down should equal Major Wave a down as a minimum. So, given that Major Wave A down was 11,355 points, if you subtract the 11,355 points from the high of Major Wave B up, you get a target of 13,407. So, for now, I’ll stay with my target of between 12,000 -14,000, a target I’ve been using for months.
BTW, if this scenario plays out like I expect it could, this will NOT be the end of the Bear Market. Sadly, it will only mark the beginning. That’s because once Major Wave C down completes, it will only be the fist set of waves in a much larger A-B-C zig-zag or 3-3-5 pattern that will likely go on for years. This larger sequence could see the Dow eventually trade down to or below the 6,000 level before the next Bull Market begins. This is the reason we need to pay attention to what’s happening in the market now. Most politicians and financial advisors are NOT telling you about the possibility of this 4-6 year Bear Market happening. But most, if not all of them don’t know anything about technical analysis or how to read a chart. I do. And what I’m telling you is that IF the Dow begins to break down and falls below the 21 April low of 22,942, the odds for the Major Bear Market scenario I described above become higher with every point of decline in the Dow. So, what I’m telling you is to …Protect yourself! Nobody else will!
The Market Timing Indicators for the Major Indexes are Neutral. If they turn Red, you might want to take appropriate action. Remember, all during mid-to late January, I was warning you about the large Ending Diagonal that was forming for the past year. I talked about how it had completed five waves up and could begin to decline at any time. I gave you a target for the decline (21,700). So now I’m warning my students again. I see a similar Ending Diagonal forming. All five waves of the retracement sequence are complete. The target for this pattern is 18,213 or lower…. possibly much lower. Again, protect yourself.
The Dean’s List and The Tide remain Positive.
The Sector Ratio fell to 9-15 Negative after Friday’s session. The top 5 Weakest Sectors were Autos, Media, Insurance, Banks, and Transportation. Once again, I’m putting the Weak Sector List in Bold because when the market starts to head down, the weak sectors lead the way down! If you own stocks in these weak sectors, they are likely going to get hammered during a decline. The strong sector was led by Material (gold) Service, Household Products, PharmaBio, and Food.
There were NO CHANGES to the Model after yesterday’s session. The Model continues to hold 750 shares of DXD, 800 shares of TWM, 1,600 shares of QID, 40 shares of UCO, 600 shares of TBT, and 500 shares of GOLD (Barrack Gold – old Randgold), with a cash balance of $17,067.
Bottom Line: The Major indexes appear close to completing their Major corrective rallies. Major Wave C down, the next crash wave, could be underway. Protect yourself!
BTW, yesterday while I was sitting on my back porch, facing south overlooking the pond at the 17the tee, I saw a strange thing. An airplane. I can usually see the contrails of many commercial airlines flying at 35,000 feet on their way to or from Miami or Orlando. But yesterday was the first time I saw an airplane in weeks. So, take some time this weekend, go outside and look up in the sky. Then think about what you’re not seeing. The lack of commercial aircraft over Florida is having a big impact on Florida’s economy. Remember, Florida depends on tourism as it gets over 80 percent of its revenue from sales taxes. No airplanes mean no tourists. And no tourists mean less jobs and less money for the state. If this goes on much longer, the state will begin taking about raising taxes. It’s not maybe this will happen…it MUST happen. And what happens in Florida will also happen across America…and the world. All the new money being printed in Washington and handed out like there’s no tomorrow will have consequences. Eventually there will be a price to be paid. That price will be in major inflation, higher taxes, and a lower standard of living. The corona virus has already changed much in America, and its impact will be felt long after the virus ends. There will be a new normal in our everyday lives, the economy, and the stock market. This is one of the reasons I believe the Bear Market will go on for years. I sincerely believe that eventually, we’re going to be OK. But I also believe we’re going to have to do things differently. That’s why I believe you should investigate my new Scalp Trading Course. Things have changed. Trading will NOT be business as usual.
So, this weekend, I want you to go outside, look up into the empty sky, and think about what I said above. BTW, don’t forget to take a stiff drink with you :>)
That’s what I’m doing,
A Few More Comments
While I’m Bearish for the next few years, I’m still not convinced that the corrective Wave B rally we’ve seen for the past month is over. With mostly positive indicators on the cockpit, a positive Dean’s List and Tide, it’s still possible that the decline that took place on Thursday and Friday was wave 2 down of Wave C up within Major Wave B up. If this is the case, the markets should resume their upward course next week.
One of the reasons I feel this way is because of the sideways consolidation area that developed from 6 -27 April. No matter how many ways I look at this pattern, it still appears to be some type of corrective triangle. Triangles are NOT termination patterns. Prices usually break out of a triangle in the direction that they enter the pattern. In this case it’s up.
So while prices broke out of the triangle early last week as expected, the question that MUST be asked is was the wimpy one day breakout all there was? Hmmm? Or is there more upside to come?
Given that the Dow was in its consolidation triangle for 15 days, I would be surprised if the rally to 24,765 was the complete rally. If you recall, my most recent projection for the Dow was near or above the 25,000 level. Yeah, 24,765 came close to that level, but 15 days of consolidation should have produced more upside, especially with a positive Tide and Dean’s List.
Anyhow, now that the Dow has declined to 23,645 on Friday, I can now revise my previous upward projection from that level. Again, IF the past two days of decline were wave 2 of a five wave sequence, that means that wave 3 up could reach the 25,000-25,500 level, with 26,500 possible after all five waves of Wave C up are complete. BTW, if this rally happens, it will likely happen very quickly, perhaps within the next 2 weeks.
This is why I MUST call your attention to the possibility of this potential rally. Form a Model Portfolio perspective, it’s one thing to hold inverse positions when the market is moving a few hundred points against you. But when there’s a possibility of a 2-3 thousand point rally in the cards, that’s quite another. So if the Dow begins to move higher on Monday, the Model will exit its inverse positions and move to the sidelines. As for me, I’ll be looking to scalp trade DDM and QLD on any strength. All this is a big IF….but again, looking at the length of the sideways consolidation and the positive indicators, I believe the odds for a significant rally can not be ignored. For this positive scenario to occur, the Dow should not fall much beyond 23, 500 on Monday.
All bets are off if the Dow continues its impulsive move downward, as a continuation of Friday’s move down means that Major Wave C down is likely underway. If you put a gun to my head today, I’d have to make the odds about 65-35 in favor of a rally.
The other thing I’ll be watching on Monday is gold. Gold (GLD) appears to have formed a small triangle for the past 10 days. If GLD moves above Friday’s high of 160.45, it would be a good indication that the next wave higher is starting. The Hockey Stick pattern on GLD projects a target near the 186 level. GLD closed at 159.78 on Friday.
Market Signals for
|DOW||NEU||01 May 2020|
|NASDAQ||NEU||01 May 2020|
|GOLD||NEU||30 Apr 2020|
|U.S. DOLLAR||NEU||28 Apr 2020|
|BONDS||NEG||30 Apr 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.
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