Professor’s Comments February 2, 2021
Posted by OMS at February 2nd, 2021
The markets staged a strong rally yesterday, retracing about 44 percent of last week’s wave 1 decline. Prices carried the Dow back to the 30,300 level, a level I mentioned as a potential stopping point, before closing down 229 points at 30,212. The NASDAQ and SPX also rallied for 333 and 60 points, respectively. Volume on the NYSE was low coming in at 87 percent of its 10-day average. There were 89 new highs and only 2 new lows.
As I said in the WSR, “the Dow could rally to the 30,300 level or possibly even to 30,500+ before it completes. Sub-wave 2 retracement rallies are hard to predict.”
I’ll stay with this prediction. I’ll also stay with the other thing I said in the WSR which is “once the ‘bounce’ completes, a significant wave 3 of Wave 3 decline should develop that will drop the Dow down to the 29,300 level. This decline should begin sometime next week, so watch for it.” I will be looking to establish short positions in stocks and inverse index ETFs later today. Again, my target for the next major wave down on the Dow is near the 29,250 – 29,300 level, possibly lower.
My target for wave 3 down of Wave 3 down on the S&P500 is near the 3,600 level which is slightly below the 4 January low of 3,663. Yesterday the index closed at 3,774.
Bottom Line: The Bear Market is only getting started. Protect yourself.
The DMI on the Dow turned negative on 25 January and remains Negative. The Market Timing Indicator on the Dow (DIA) remains Negative. The same timing indicator on the NASDAQ remains Neutral. The Scalp Trading Indicators on the DIA remain Negative. The same ST indicators on the NASDAQ remain Neutral.
The Dean’s List has turned Neutral. The Tide remains Negative.
The Sector Ratio remained at 20-4 Positive after Monday’s session. The top 5 strong sectors are Insurance, Retail, Media, Service and Utilities. The four weak sectors are Transportation, Cap Goods, Household Products, and Food Drug. Continue to pay attention to the Sector Ratio as the week progresses.
Model Update: There were NO Changes to the Model. It remains 100 percent in cash.
Top Stock Rotation Strategy: I want to take a few moments this morning and talk about the algorithms that drive our Top Stock Rotation Strategy. As many of you might have noticed, the algorithms have highlighted several of the stocks ‘in play’ by the folks at Reddit who engineered the short squeeze on Game Stop (GME) and a few other stocks. And like I said before, my algorithms don’t give a hoot about what’s driving the price of these stocks up, all they do is sense is the momentum, volume and price movement. We saw this in TSLA, DDD, BBBY, DDS, WPRT, and several others. Heck, if I thought GMW was a great stock, I could have included it in the data base for the MWL and it would have been highlighted by the algorithm too. But with the Corona virus infecting millions of people, the time for GME has passed. Nobody goes to shopping malls anymore to buy video games. If they want, gamers can now download these games right from their homes. Just remember what happened to Blockbuster and Redbox. Streaming video made them obsolete. Heck, I don’t even own a DVD player anymore.
Anyhow, the reason I bring this up today is that yesterday I heard a few people talking about Reddit doing the same thing with SLV, the silver ETF. Hmmm? Interesting. I heard one commentator say the potential short squeeze could drive prices to the 50 level. Again…interesting, as I really like to trade gold and silver. But is this realistic? I think not.
Here’s why: In order for a short squeeze to happen, the stock needs to have a small float and a ton of short interest. This was the case for GME, where there were more shares shorted than available for purchase. It was easy for both a short squeeze and a gamma squeeze to happen. (A gamma squeeze occurs when the market maker is holding so many option shares that once the price begins to rise, even he must cover his bets by purchasing shares of the underlying stock. This is what caused GME’s price to skyrocket.
But can the same thing happen with SLV? I think not. As of yesterday, the large speculators were net long 33 percent of the available float which is considerable. So, when I hear people talking about a silver squeeze, I MUST ask…” Who are they going to squeeze?” Most investors are currently long silver.
In the short term, silver could rally to the 30 level in a final wave ‘c’ up of Wave 2 up. The charts allow for this. But 50? I just don’t see it. Yesterday’s pop to 27.98 might have been its high. A break below Friday’s low of 24.77 would have negative consequences for SLV as I believe the metal could see the 20-21 area before the next major rally occurs. Anyhow, if you hear more silly talk in the days ahead about a short squeeze or a gamma squeeze in any stock or ETF, just check the short interest and float. If the short interest is low and the float is adequate, it’s NOT gonna happen. Today’s silver market is large, not like back in the 80s when the Hunt Brothers were able to manipulate it. So, for now, I just don’t see a squeeze coming in SLV.
About an hour before yesterday’s close I bought a few Put options on DIA. I purchased the March 19 285 Put near 4.90. If the market opens higher this morning, I’ll be looking to add to that position and buying a few SPY 320 and 330 March 19 Puts. I’m also looking to establish a few short positions in XLNX, CCL, ACGL and RCL from the ‘Weak List’. The weakest stock on the ‘List’ is currently LVS with an RS ranking of 5 which is still low compared to the top stocks on the strong list (MWL). The top 5 stocks on the MWL have RS rankings between 11 to 39. So, the strong stocks are still a lot stronger than the top stocks from the weak list. This might not be the case as we move closer toward the end of the week.
I fully expect February to be a down month judging from last week’s 52-week high followed by a 3 percent down close. Historically, this negative action tends to produce even more downside in the weeks ahead, with several cases being significant declines.
None of the stocks or options are recommendations. I don’t make recommendations. I just trade what I see on my Lists and follow the ST indicators.
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
02-02-2021
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 27 Jan 2021 |
NASDAQ | NEU | 27 Jan 2021 |
GOLD | NEG | 08 Jan 2021 |
U.S. DOLLAR | POS | 27 Jan 2021 |
BONDS | NEU | 27 Jan 2021 |
CRUDE OIL | POS | 11 Nov 2020 |
Category: Professor's Comments