Professor’s Comments July 20, 2021
Posted by OMS at July 20th, 2021
The markets fell hard yesterday, one day after the ST volume on the Dow turned negative and the momentum indicator moved out of the Trend Zone. In the matrix I developed and gave to students several months ago as part of the follow on training for the Scalp Trading Class, this was listed as a classic Trend Reversal Sell Signal. Coming on the heels of Friday’s re-test of the Dow’s 10 May high of 35,090, the Sell Signal likely means that the final Wave ‘E’ up has truncated and that there is now a high potential for a market selloff.
Yesterday’s gap down opening was likely the initial break away gap of a major trend reversal. The decline was impulsive, giving further evidence that a major trend reversal is underway. Volume on the NYSE was EXTREMELY heavy, coming in at 134 percent of its 10-day average. There were only 20 new highs and 96 new lows. Declining issues swamped advancers by 2879 to 516. Over 90 percent of the volume was to the downside.
At this point, it’s likely the market will stage some type of bounce back rally. However, given the technical damage that has occurred during the past two days, it will likely be a dead cat bounce. From a technical perspective, yesterday’s decline was likely sub-wave 3 down of a five wave sequence. This means that any bounce in the next few days will be sub-wave 4 to be followed by another round of selling.
Yesterday’s downside ‘gap’ started from the 34,682 level on the Dow. So, this makes that level a natural target for sub-wave 4 up. The Japanese call this ‘closing the window’. I’m not sure if the Dow will get this high given yesterday’s selling pressure, so I’ll be looking to short the market at levels near or above 34,600. This is where I’ll be watching the ST indicators on the 10 min bars closely. The downside ‘gap’ retracement level on the S&P is 4322. So, I’ll be looking to short the S&P at levels near or above 4300.
Once the wave 4 retracement completes, my downside target for the Dow is the 33,250 level. My initial downside target for the S&P is near the 4170 level+/-. It’s also possible that the S&P could fall to 12 May low of 4057. Downside projections beyond this number will depend on how the patterns and wave structure develops in the days/weeks ahead.
The Market timing Indicators for the Dow have turned Negative. The same timing indicators for the NASDAQ remain Neutral.
The Scalp Trading Indicators for the Dow (DIA), SPX (SPY), and NASDAQ-100 (QQQ) have turned Negative.
The Dean’s List remains Neutral as QLD and QQQ are still on the List. The Tide remains Negative. Students should note how short the Dean’s List has become and how the inverse ETFs have replaced most of the positive ETFs.
The Sector Ratio remained at 4-20 Negative after yesterday’s session. The top four strong sectors were PharmaBio (2), Household Products (1), Computers (1) and Services (0). Students should note how the RS ratings of the strong sectors continues to weaken with only one top sector now supporting an RS rating of +2. As I’ve noted before, that’s a big change from what we saw a few weeks ago when all the top sectors had RS ratings 5 or more. Students should also note the top sectors are becoming extremely defensive, with Household Products now #2 on the List.
The top five weak sectors were Banks (-5), Energy (-4), Material (-3), Transportation (-3), and Insurance (-2).
Model Update: There were NO Changes to the Model. It remains 100 percent in cash.
Top Stocks: The MWL is no longer dominated by top ‘stocks’. Now, the number one issue on the List is VXX, the S&P volatility index. It is followed by RWM, the inverse ETF for the Russell 2K. They have RS rankings of 6 and 3. The third highest ranked stock is Apple (AAPL) with an RS ranking of 2. My, how things have changed. With the ST indicators now negative on all indexes, the remaining top stocks on the List will have to fight the negative indicators. This is not something students should try to do. Now that the indicators have turned negative, the path of least resistance is to the downside by either shorting stocks or using inverse index ETF, especially on any bounce.
The top five stocks on yesterday’s Weak List are NBR, CVI, CCL, CDE, and PDCE. These are followed by SLB, TEVA, WKHS, JBLU, and RCL. Students should note that that the top stocks on the Weak List are mostly energy and cruise line related. Yesterday’s decline was triggered by concern of a potential Third Wave in Covid19. If this is the case, the cruise lines, which have been recovering from Covid19 issues, could see another round of selling. After the first bout of Covid19 in February 2020, RCL fell from 135 to a low of 22.77. It recently traded as high as 97.72. Yesterday, RCL closed at 69.51. If the stock retraces back to Friday’s close of 72.39, I’ll be watching the ST indicators on the 10s for a possible short. The 15 month retracement could be viewed as the ‘Blade’ of a negative Hockey Stick Pattern. If this is the case, RCL could be trading in the mid to low 20s in the months ahead.
Gold: Not much happened with gold yesterday. Gold (GLD) rose 0.20 cents on the day to 169.61. The metal still appears to be in the final stage of completing a counter-trend rally that started on 29 June. The Timing Indicators on GLD are currently Neutral. If they turn negative, I’ll start looking to short gold for a move down to the 1,750 level, possibly lower.
BTW, yesterday the Dollar made a new high of 93.039. The upward move came after the Dollar formed a five wave consolidation triangle for Wave 4. This means that the Dollar could have a bit more upside before the five wave pattern that started on 25 May are complete. If this is the case, gold will likely fall as the Dollar rises. The thing to watch during the next few weeks is the Timing Indicators on Gold and the Dollar. If they reverse and the Dollar turns negative, it will likely mark the bottom of gold’s decline. Remember, the ‘bottom’ I’m talking about is finishing the ‘handle’ portion of the Bullish Cup and Handle Pattern for gold.
Bonds: Still no change in signal for Bonds. Bonds still appear to be completing a retracement wave 4 that started from the 18 March low. As of last night, the Timing indicators for Bonds (TMF) remain positive. If they turn negative, I’ll start buying TBT, the inverse Bond ETF. Again, wait for the signal to change.
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
07-20-2021
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 19 Jul 2021 |
NASDAQ | NEU | 15 Jul 2021 |
GOLD | NEU | 14 Jul 2021 |
U.S. DOLLAR | POS | 06 Jul 2021 |
BONDS | POS | 28 Jun 2021 |
CRUDE OIL | NEG | 19 Jul 2021 |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
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