Weekend Strategy Review October 27, 2019

Posted by OMS  at October 27th, 2019

The markets rallied on Friday on relatively light volume and weak breadth (A/D ratio closed at 1.28:1). The Dow finished with a gain of 153 points at 26,958. It was up 188 points for the week. The NASDAQ rose 57 points on Friday and was up 154 points for the week.

Friday’s rally caused the market timing indicator for the Dow to turn positive, joining the NASDAQ, SPX, and Russell 2K on Buy Signals.  However, these timing indicators are still very close to the zero line and could change within the next few days.

The reason I say this is because I’m seeing non-conformations between the major indexes and weakening breadth and volume.  Friday’s rally was accomplished on less volume than Thursday’s decline, which caused the Volume Accumulation Percentage and the On Balance Volume to continue to remain weak or be negative. Also, Friday’s A/D ratio was the one of the weakest since the Dow began its rally on 3 October.  Breadth and volume measures like this are usually a sign of a tired market.

There was a small change in the A-D oscillator on Friday, so we need to be on the lookout for a Big Move within the next 1-2 days.  That move could easily be to the downside.

The reason I say this is because Friday’s rally on the NASDAQ carried it to a level where my projected target for an a-b-c move for wave 2 up should complete.  If this analysis is correct, the NASDAQ should begin to decline by the middle of next week. This decline should be impulsive and could last for several weeks. If this decline starts to develop, it should take the other major indexes down with it.  This potential negative pattern would be negated if the NASDAQ rises above the 8,340 level.  

The Dean’s List remains Neutral with a Positive Tide.  Friday’s rally did not cause DXD, the inverse ETF for the Dow, to drop from the List.  So, the Dean is still seeing something that is causing him to remain cautious about the current rally.  If he’s cautious, I’m cautious.

The market remains in a very fragile condition.  With mostly neutral to positive indicators on the cockpit, the odds still favor a continuation of the current rally before a major top is in.  However, the weak breadth and volume numbers are quickly reducing those odds.

The two scenarios I have been discussing for the past few weeks remain on the Board.  But again, because of the weak breath and volume, I must now reduce the odds for the Dow reaching the 27,500-27,700 level.  Unless we start to see an increase in the breadth and volume, I have a hard time seeing the Dow getting back to the 12 September high of 27,307.

The alternate scenario is that the top is already in.  In this alternate scenario, the past few days of up down up action could still be part of retracement wave 4 up of Wave 1 down that began from the high of 27,112.  If this is the case, the 3 October low of 25,743 remains as a potential target for wave 5 down of Wave 1 down.  If the market timing indicators turn negative this week, this alternate scenario will become my primary scenario.

However, before this can happen, the Sector Ratio needs to undergo a major change.  At 23-1 Positive, I still can’t get too negative on this market.  IF the alternate scenario is going to develop, the Sector Ratio MUST start to weaken. Right now, the Strongest Sectors are Service, Retail, Autos, Semiconductors, and Banks. The one weak sector is Household Products.

As long as the market timing indicators AND the Sector Ratio remain positive, the odds favor a move toward the September or July highs of 27,307 or 27,399.  A change in the timing indicators would negate this Bullish Scenario and likely mean that Wave ‘D’ up has truncated.

Gold (GLD) rose 0.33 cents to 141.86 on Friday.  The rise cause GLD to break above the Upper Trend line of its Wave 4 triangle that has been forming since 4 September.  Because of this, the Model will begin to look for opportunities to buy gold related stocks and ETFs during the next few days.  Gold (the metal) could rally to the 1,600-1,650 level in Wave 5 up.

Bonds (TMF) fell 0.46 cents on Friday, causing the Models inverse shares of TBT to gain 0.25 cents to 25.92.  The Hockey Stick Pattern on TBT suggests a rise to 28+ level, possibly a few points higher. BTW, students should look at a chart of TBT to see how it formed a TLB Pattern and bounced for Wave 1 up. Students should now try to determine the location of the projected target. Hint: look for the interim high between the first two lows.

Shares of UCO (crude oil ETF) rose another 0.30 cents on Friday to 17.72.  The ETF is fast approaching the upper trend line of its four month long triangle, so it will likely need to consolidate for a few days before attempting to break out of the triangle.   A move above the 18 + level would confirm the breakout. This is where I will start getting serious about crude.

The Model sold its shares of DDM on Friday at 49.34.  The Model is currently holding 1,500 shares of UCO, 600 shares of TBT and $86,876 in cash.  After Friday’s session, the Model is up 29 percent which translates to an annualized rate of return of 46.8 percent.

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.

That’s what I’m doing,

h

Market Signals for

10-26-2019

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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.