Professor’s Comments February 28, 2020

Posted by OMS  at February 28th, 2020

Stocks got hammered again yesterday, the worst one day decline in the history of the market. The Dow finished the day with a loss of 1,191 points, closing at 25,767.  The Dow has now lost 3,791 points since the decline started on 12 February.  All of the gain since last August has been wiped out in four days of trading. Unfortunately, it appears the Dow might have a bit more decline to go before the current wave bottoms.

But don’t despair, I am starting to see signs of a bottom.  Yesterday, the A-D oscillator closed in massively oversold territory. It’s reading of -378 was the lowest reading I have ever seen.  Also, the past three day readings of -285, -298, and yesterday’s -398 exceeded the values of any crash in recent history.  The only one I didn’t check was the crash of 1929, but that decline is not comparable because there are more stocks available to trade today than back then.  Anyhow, three-day EXTREME oversold readings like this tell me that a bottom is close.  BTW, this bottom is NOT the end of the Bear Market.  The Bear is only getting started. More than likely, when the market bottoms, it will only be the end of Major Wave 1 down.  A retracement rally, Major Wave 2 up will be next.

But here’s the deal:  If the Dow is working on wave 5 of Major Wave 1 down, my primary scenario, the decline should end within the next 1-2 days.  If not, the Dow is working on impulsive wave 3 down, meaning the decline still has more downside to go before a sustainable bottom is at hand.  The fact that the A-D oscillator is so oversold now leads me to favor the wave 5 scenario.

Also, yesterday was the third 90 percent down volume day in the past five sessions.  In the past, this has also been a good indication that a short-term bottom is approaching.  

On the other hand, the number of new 52-week lows is the highest since December 2018.  And when I look back, the market was trading lower 3-5 days more than 70 percent of the time.  This would tend to support a continuation of wave 3 down.

All the market timing indicators remain negative.  The Sector Ratio came in at 23-1 Negative last night.  The only strong sector was Telecoms, and it wasn’t that strong with an RS rating of 1.

Bottom line:  We could be getting close to a bottom, but we’re not there yet. 

Be patient, keep your head, and watch the indicators. 

BTW, if you have been paying attention to the indicators, you probably noticed that Crude Oil (UCO) has been getting hammered since its last Sell Signal.  I expect this to change soon as UCO appears to be completing wave 5 down of its most recent leg within its month’s long triangle.

Same for gold.  Gold has rallied as equities and mining stocks have declined.  I expect this to change soon.  Gold (GLD) appears to be nearing completion of a 5 wave rally that started when Major Wave 4 completed on 11 November.  I’ll be watching DUST and DGLD for trading opportunities.

Royal Caribbean (RCL) is also something I’m watching.  A month ago, RCL was trading at 135.  Yesterday, the stock gapped down to the 70 level and then bounced to form a ‘Hammer’ candlestick.  Hammers are usually found at or near bottoms.  Yeah, I know that the corona virus is scaring the heck out of investors, knocking the price down.  But corona won’t cause the world to end.  RCL’s ships will still be sailing years from now, and the price of its stock will likely be a lot higher.  I’m just looking for prices to stabilize and give me an entry point.

That’s what I’m doing,

h

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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