Professor’s Comments October 20, 2020

Posted by OMS  at October 20th, 2020

The markets fell as expected yesterday with technology stocks leading the way down. The Dow finished with a loss of 411 points, closing at 28,195.  The intraday low of 28,139 was lower than the 15 October low of 28,181 and that creates a problem for the overall pattern I’ll talk about below.  The NASDAQ and S&P were down 193 and 57 points, respectively. Volume on the NYSE was moderate, coming in at 105 percent of its 10-day average. There were 86 new highs and 21 new lows.

If you recall, for the past few weeks I have been writing about two possible scenarios for the Dow: one Bearish (a Wave 2) and one Bullish (a Wave 5).  The Bearish scenario would have the Dow re-test the area near the 3 September high of 29,199 and then fall.  The Bullish scenario would exceed 29,199, then pull back slightly before rallying to 30,000+ into the election.  Yesterday’s decline provided some clarity as to which scenario is taking place.

By falling below the 28,182 level, the Dow increased the chances that Major Wave 2 up completed on 12 October. This is because yesterday’s intraday low was lower than the low made on 15 October.   From a technical perspective, that shouldn’t happen.  If the 15 October low was wave 1 down and the 16 October high of 28,842 was wave 2 up, the decline since that high should not have exceeded 28,182.  It MUST be something else and that means that it’s likely part of Wave 3 down in a Bear Market.  It also means that after a small retracement wave today or tomorrow, the Dow will likely begin to trade significantly lower in the weeks ahead.

The pattern is the same on the NASDAQ.  During the weekend, I wrote that the NASDAQ would likely trade down to the 11,500-11,600 level before wave ‘c’ down completes.  Yesterday, the NDX closed at 11,634 after reaching a low of 11,606. I also said that once this ‘c’ wave completed, the NDX should resume its rally as Wave 3 up unfolds. But yesterday’s sell off on the Dow changed all that.  Now it’s more likely that the recent rally on the NASDAQ was a retracement Wave 2 up, making the 2 September high the completion of the Bull Market.  The fact that my custom VTI also turned negative supports this Wave 2 scenario. The only thing that would cause this Bearish outlook to change would be a rally back above the 12 October high of 11,965.  This is the NASDAQ’s key level if prices are to push higher.  Otherwise, the odds now favor a decline that should see prices begin to drift lower into the 21 September low of 10,678 with even lower prices likely.  

The Market Timing Indicators for the Major Indexes remain Neutral.

The Dean’s List and The Tide are also Neutral.

The Sector Ratio fell to 16-8 Positive after yesterday’s session.  Yesterday was the first time the Ratio fell below 20+ positive in weeks.  The weakness in the Sector Ratio supports the possibility that the markets could have topped and are now in the initial stages of a Wave 3 decline.  Remember, Wave 3 down won’t start to fall immediately.  It too will have five waves of decline.  Yesterday could have been wave 1 down of Wave 3 down, so the next 2-3 days could see a small wave 2 up develop.  We’ll see.  The top five strong sectors were Retail, Transportation, Autos, Cap Goods and Consumer Products. The five weakest sectors were Media, Real Estate, Banks, and Leisure.

There were NO Changes to the Model after yesterday’s session.  The Model remains mostly in cash with a small portion of its portfolio (about 20 percent) in gold. 

That’s what I’m doing.

h

BTW, students with the new Scalp Trading Indicators should note that the indicators on the Q’s remain mixed, with a negative volume indicator and an oversold RSI. What does this tell you the Q’s will likely do today? Hmmm?

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

10-20-2020

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.