Weekend Strategy Review September 8, 2019
Posted by OMS at September 8th, 2019
The markets were mixed on Friday as the Dow rallied while technology stocks on the NASDAQ fell. The Dow finished with a gain of 69 points, closing at 26,797. It was up 394 points for the week. The NASDAQ was down 14 points on Friday but up 140 points for the week.
On Friday I received a few emails from students asking about the current rally. In my reply, I said “Sometimes Wave 2s move higher than anybody expects. But so far it doesn’t change the fact that the rally still appears to be a retracement wave 2. Also, note that the trannies are NOT moving higher today, which is a NON-confirmation of the current rally.”
I talk about Wave 2s a lot in my Comments and how tricky they are to trade. And like I said above, even though they sometimes move higher than expected, it doesn’t change the fact that these are retracement waves and NOT the start of a new up trend. The primary trend remains down.
Yesterday’s high in the SPX was an exact 0.786 retracement of Wave 1 down, which is a maximum common retracement number. At yesterday’s high, the Dow moved to within a fraction of the 0.786 number, so it too appears to be near or at the end of its run. If this analysis is correct, the Dow’s next move should see it fall below the 15 August low of 25,340. This would start a sequence of waves for Wave 3 down that would test the 3 June low of 24,680 and eventually the 26 December low of 21,713.
One of the things I’ve been talking about during the past few weeks is the trannies and how they would lead the market down. This might have started on Friday, as IYT, the Transportation ETF, closed down 1.18 points at 185.86. I was watching the trannies closely on Friday and while the Dow was moving higher, the transports were not participating in the rally. This was a classic Dow Theory non-confirmation. The same could be said for technology stocks on the NASDAQ, as they too diverged from the Dow closing 14 points lower. The QQQ is currently riding Trend Line support near the 183 level. Any break of this Trend Line should send prices significantly lower, as the Trend Line is also support for a major Head & Shoulders Pattern. The 183 level in the Q’s is like the 175 level I continue to mention in IYT, the ETF for the transports. If you still own the transports or large cap technology stocks, you don’t want to see either of these levels broken.
Bonds are another investment vehicle that might have topped on Friday. Looking at a chart, the rally from October 2018 appears to be a perfect 3-3-5 zig-zag or flat pattern with all five waves of final wave ‘c’ complete. My VTI-volume indicator on TMF is still on a Buy signal, but both the volume and momentum portions of the signal are getting close to turning negative. If the signal turns next week, the Model will likely buy a few shares of TBT, the inverse ETF for Bonds.
BTW, the rally in the Dollar also appears over as does the decline in the Euro. As I’ve said many times before, I don’t trade the Dollar or the Euro, but if I did, I’d be looking for a spread in the Dollar-Euro, shorting the Dollar and going long the Euro. Another way to play this would be to Buy UDN and FXE when both appear on the Dean’s List. But this is still like watching grass grow. The reason I watch the Dollar is because of its relationship to treasuries. So, IF I think Bonds are topping, I always want to see the Dollar peaking too. That’s why I’m currently interested in TBT. TBT and the Dollar have an inverse relationship, so IF you want to trade Bonds next week, look for UUP to drop off the Dean’s List and for UDN to appear. For me, this would confirm that a long term decline in Bonds is about to begin. A decline in Bond prices would mean that long term interest rates in the U.S are about to INCREASE! This is not something that government or Wall Street analysts are saying right now and it’s NOT something that holders of equities would like to see. But that’s what the Bond chart is currently showing. We’ll see….
Gold appears to have completed its Wave 3 up rally and should begin its Wave 4 decline before moving higher. The problem that I see for gold is that its rapid rise from early June through early September was almost straight up, driven by world events and not fundamentals. And because of this, golds Wave 4 pullback could get complicated. It should consist of a minimum of 5 waves, and the final wave down could drop a lot lower than what might normally be expected. A decline to the 2 May low of 1266, while not likely, is not entirely out of the question. But here’s the thing: Whatever happens, money invested in gold now will likely be dead money for several months. And trading triangles is NOT something I want to do for the Model, especially with the possibly of a Wave 3 down developing in equities. Given the choice, I’ll always trade something where I believe a Wave 3 is developing vs. trying to trade a frustrating corrective triangle. It’s just a lot easier. If you don’t understand what I mean by this, just take a quick look at a chart of UCO, the Crude Oil ETF. It’s been stuck in a triangle for the past three months and has remained flat. It’s the reason the Model doesn’t currently own any shares of UCO or SCO.
Anyhow, the market remains in a very fragile condition. The fact that Wave 2 up could be nearing completion suggests that a severe decline could begin soon, if it hasn’t already started on some indexes. Protect yourself.
There market timing indicator on the Dow is Positive. The NASDAQ, SPX, and Russel 2K are on Neutral Signals. So the signals are mixed, which is usually a good indication that a corrective rally is underway.
The Tide and Dean’s List are Positive.
The Sector Ratio remained at 14-10 Positive after yesterday’s session. The RS ratings of the Sectors on the Strong List are still mostly 1s and zeros, so one decent down day could produce a significant change in the Ratio.
I found it interesting that the Strong Sector List was mostly led by ‘defensive’ sectors, such as Service, Semiconductors, FoodDrugs, Household Products, and Telecoms. The Semis are the only ‘aggressive’ sector on the Strong List. The Weak Sector List was led by Real Estate, Leisure, Autos, Energy, and Banks.
Model Portfolio: The Model continues to hold 1,200 shares of DXD and 1,000 shares of SQQQ. Available cash is $62,974 after the Model was stopped out of its gold position in UGL. The Model continues to look for high probability trades to put its cash to work.
After the past few days of rally which caused the Model’s inverse positions to decline, the Model is up 25.4 percent, which translates to an annualized gain of 53.5 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
Here’s the cheat sheet I will be using for my trades next week:
1. Dow: Working on final wave ‘C’ of Wave 2 up. May need one more rally to complete Wave 2 up. If the Dow only has a small drop early in week, it’s likely wave ‘b’ down of ‘C’ up. If this is the case, look for final rally to complete later in week. Otherwise, look for impulsive decline. Start of Wave 3 down MUST be impulsive. If not, it’s probably part of Wave ‘C’ up. First target for impulsive decline likely near the 24,700 level. Eventual target near 21,700.
2. NASDAQ-100: Could rally to 7,900 before falling. NDX has developed a negative Hockey Stick Pattern with 7,550 as support. A break of 7,550 would confirm Wave 3 down is underway with initial target near 7,200 then below 5,800.
3. SPX: Small rally to 3,028 is possible; then significantly lower. Wave 1 of 3 down should take SPX close to 2,820 level.
4. Russell: Lower toward 1,420 to 1,430. Short on bounce.
5.Trannies (IYT): Could have topped on Friday. Next move should be down to test 175 level. If 175 doesn’t hold…it will be a long way down. Look to short transportation stocks.
6. Gold: Currently at 1,515. Eventual target above 1,600-1,650, but metal needs to pullback in Wave 4 down before next rally leg begins. Wave 4 target for GLD is near 137 level. Entry near 137 should make for nice trade of Wave 5 up. HUI could pull back to 200-210 level before rising,
7. Crude Oil: Still stuck in triangle. WTIC should trade down to 48 on current leg down, then rally to 56. Look for short-term trade if signal turns Negative.
8. Dollar: Still on positive signal. If $ signal turns negative, Dollar should fall from 98+ to 96 over next few months, then rally back to 102+. Not much of a trade here.
9. Bonds: Topping. Look to buy TBT when it appears on Dean’s List to trade minor wave 4 down. Short-term trade only as Bonds still have one more leg up to complete pattern. Look for choppy trading in Bonds during next few months.
10. Europe: Short Europe with EPV on any rally. Currently at 31.68, HS Pattern suggests move to 36-37. Same for Emerging Markets with EEV. Target near 52-53.
Market Signals for
09-09-2019
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | SM CHG |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 05 Sep 2019 |
NASDAQ | NEU | 06 Sep 2019 |
GOLD | NEU | 05 Sep 2019 |
U.S. DOLLAR | POS | 29 Aug 2019 |
BONDS | POS | 23 Aug 2019 |
CRUDE OIL | NEU | 04 Sep 2019 |
Only getting the Professor’s Weekend Review? Try his daily update Cum Laude service for 2 weeks only $9.99 LEARN MORE
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.
Category: Professor's Comments, Weekend Strategy Review