Professor’s Comments February 25, 2020

Posted by OMS  at February 25th, 2020

The markets fell hard yesterday, the third worst single day decline ever. The Dow finished with a loss of 1,032 points, closing at 27,961.  The NASDAQ and SPX were down 355 and 112 points, respectively.  Volume on the NYSE was heavy, coming in at 132 percent of its 10-day average.  There were 86 new highs and 245 new lows.

I heard a lot of reasons for yesterday’s plunge in the media, ranging from new outbreaks in the corona virus in Korea and Italy, China’s economic slowdown and the effects this will have in Europe and the U.S.  But the real reason for the decline was that all of the major indexes were in the final stages of a Wave 5 Bearish Wedge termination pattern.  The news was just the trigger.

For the past few weeks, I have been warning students that the measures of investor sentiment I have been watching were at EXTREME levels.  I said that while the Put/Call ratios can be a bit early, they are almost NEVER wrong.  So, yesterday’s decline came as no surprise.  The two Bullish scenarios I had on the Board suggested the Wave 5 rally could continue into early March.  Both of these Bullish scenarios were blown up yesterday when the Dow opened below its lower channel support line near 28,700.  If you recall I had also warned that both scenarios DID NOT have to reach their targets as the final waves of an Ending Diagonal can and often do truncate.  That’s what happened.

OK, so what happens next?  Well, it’s pretty clear that yesterday’s decline was impulsive wave 3 down of a five wave decline in a new Bear Market.  Given that yesterday’s reading of the A-D oscillator was only 181.99, I must believe that the wave 3 decline is NOT over.  In yesterday’s early comments I talked about the 27,500 level, the place where the 200-day moving average is located, as a likely target.  The other potential level for the completion of wave 3 down is 27,677, which is a 50 percent retracement of Wave 5 up.  So, we have two likely targets for wave 3 down, both near the 27,600 level.  I’ll go with these targets for now.

After wave 3 down completes near 27,600 +/-, there should be a small bounce for wave 4, probably back to the 28,200 level before the Dow finally completes wave 5 down of Wave 1 down near or slightly below the 27,500 level.  Then, here’s the good news…

Once Wave 1 down completes, there should be a strong snap back rally that takes the Dow back to the 29,000 level.  Not sure what will trigger this yet, either good news about the spread of the corona virus or some type of stimulus from the Fed.  Remember, this is an election year and President Trump will likely be putting extreme pressure on the Fed to do something. So, the odds for a snap-back rally are high. But this rally will only serve to fill the gap formed by yesterday’s decline before the devastating effects of wave 3 of Wave 3 down begin to take hold. Wave 3 down has the potential to drop the Dow down to the 25,500 level or lower.

Anyhow, now that the new Bear Market has been confirmed, it looks like the next few weeks will see some extremely volatile trading.  At this point, if the market rallies, I’ll be looking to put on a few ‘trial’ short positions using inverse ETFs.  But given the volatility for the projections I outlined in paragraph above, finding good entry points will be very difficult.  If the Dow rallies during the next day or so, there may be an opportunity for a short term trade down to the 27,500 level. If I see an entry point, I’ll post it.  There may be a better opportunity for a short trade in gold (see below).

Yesterday’s decline turned all my market timing indicators Negative.  The DMIs on the Dow and NASDAQ-100 (QQQ) are also Negative as are the Dean’s List and The Tide.

The Sector Ratio confirmed the timing signals by coming in at 15-9 Negative.  This is the first time in months that the Sector Ratio has been negative. The Strong Sector list was led by Telecoms, Computers, Real Estate, Household Products and Utilities.  The Weak Sector List was led by Autos, Energy, Semiconductors, Transportation and Consumer Products.

Model Portfolio:  The Model sold its shares of DDM during a small bounce just after the market opened.  So now the Model is 100 percent in cash.

Gold (GLD) rose to 158.53 yesterday before closing up 1.39 points at 156.09.  Gold appears to be EXTREMELY overbought now and yesterday’s rally could have completed an important top.  I started shorting gold (scalp trades) yesterday afternoon in my own trading account using DUST and DGLD inverse ETFs.  If the timing signal for gold turns negative, I’ll add a few shares of these ETFs to the Model.  If gold has completed its Wave 5 up, the next series of waves could take gold back down toward the 1,100 level.   If you have time, it would be a great learning experience to look at a chart of GLD and see if you can count the waves since the ETF completed its Wave 4 triangle on 12 November.

That’s what I’m doing.

h

Market Signals for

02-25-2020

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The Creation of Waves and Trends
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