Professor’s Comments April 23, 2020

Posted by OMS  at April 24th, 2020

After two days of strong decline, the markets rallied yesterday from extreme oversold conditions. The Dow finished with a gain of 457 points, closing at 23,476.  The NASDAQ and SPX were up 232 and 63 points, respectively. Volume on the NYSE was moderate, coming in at 90 percent of its 10-day moving average.  There were 16 new highs and 22 new lows.

The past few days of choppy up-down-up movement on the Dow has formed a consolidation area that suggests that Major Wave B up is not over. The odds are increasing that the choppy sideways trading we’ve been seeing for the past two weeks is part of Wave B down of an A-B-C pattern. This means that once Wave B down completes, the Dow could make one more rally leg for Wave C up to complete Major Wave B up.  Then once Major Wave B up completes, another crash wave (Major Wave C down) should begin. This wave should take the Dow trade back down to the 17,000-18,000 level, with 12,000 to 13,000 possible if Major Wave C down extends.

As I said in Tuesday’s Comments, with mostly positive indicators still on the cockpit, and an unclear wave pattern, it’s still possible that the markets could make one more rally. This is still not the time to be aggressive on the short side.

I had my first follow-up session to the Scalp Trading Class yesterday where I answered questions and looked for potential set-ups to trade.  Unfortunately, we didn’t see any set-ups develop during the session.  It was only late in the day, just before the close, that a short set-up developed on the Dow, so I bought several DXDs.  Because I only had a small profit on the position, I decided to hold some of the DXDs overnight, which I rarely do. But after looking at the sideways pattern discussed above, I’ll likely exit the DXDs sometime today if the short-term signals on the Dow turn positive.

The Market Timing Indicators are Neutral.

The Dean’s List and The Tide also remain Positive. 

At this point, with the Market Timing signals Neutral,and The Tide and Dean’s List remaining positive and a Negative Sector Ratio, Scalp Trading remains the order of the day. As I said above, this is NOT the time to be aggressive on the short side.  The VTI indicator, the indicator that drives the Market Timing Signals, is NOT in the Trend Mode and the 2-period RSI is showing a Neutral reading of 53.7.  This means that the market has relieved the oversold conditions that were present going into yesterday’s session and is free to begin its next major move which could be up or down. The next day or so will be critical for establishing the direction of that move, so don’t get carried away with a lot of new positions until the market shows its hand.

The Sector Ratio weakened to 9-15 Negative after yesterday’s session.  The Strong List was led by Material, Utilities, PharmaBio, Healthcare, and Food Drugs. The Weak List was led by Media, Banks, Transportation, Autos, and Service.

Gold and the miners rose yesterday. The VTI on GLD has moved into the Trend Mode which suggests that Wave 3 of Wave 5 up is underway. This wave could take GLD to significantly higher levels. Right now, the 2-period RSO on GLD is overbought. If it pulls back, I’ll look to buy a few shares of GOLD for the Model.

The Banking Sector is another sector I’m watching for possible shorts. Last night, the Sector moved to the #2 position on the Weak Sector List. The three stocks I’m looking at in the sector are CMA, USB, and WFC.  The reason I’m watching these stocks is because the VTI has moved into the Down Trend Mode on all three.  Banks are an interesting short now, because of their impossible position with mortgages. I saw an article that said 1.3 of renters did not pay their rent for March.  So, if renters are not paying, it’s likely that a lot of homeowners with mortgages are in the same boat.  This brings into question the value of the mortgage backed securities that many banks are involve in. If you recall, this was one of the reasons for the crash of 2007-2008, when these securities were priced at 10 cents on the dollar, mostly because nobody knew what the real value of the security was worth. Last week, when Disney moved to the top of the Weak List, I started shorting the Mouse just under 108.  Yesterday, even with the rally it was just under 101.  So with mixed signals on the cockpit, If I do anything today, I’ll probably look for a few short set-ups in the banks. Just going with the odds. 

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, and 40 shares of UCO, the ETF for Crude Oil, with a cash balance of $39,366. The Model continues to show a slight gain vs. a loss of 13.5 percent in the SPX for the same period.

Bottom Line:  The Major indexes appear close to completing their Major corrective rallies.  

That’s what I’m doing,

h

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.

Market Signals for

04-23-2020

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
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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.