Weekend Strategy Review February 21, 2021

Posted by OMS  at February 21st, 2021

The markets rallied early on Friday and then fell late. The early rally appeared to be corrective and was likely related to the completion of sub-wave 2 up within wave 3 down.  But at this point, with mixed signals on the major indexes, the jury is still out as to whether the final top is in or if the markets will have one more final rally next week before calling it quits.

Here’s my take on the various indexes:  The Dow Industrials made a new high yesterday of 31,647.  However, the trading vehicle for the Dow, the DIA, did not.  Its high was almost a full point lower than last Wednesday’s high of 316.91.  In other words, there was a significant divergence between the price of the Dow Industrials and what traders were willing to pay for that new high. This divergence is very unusual and is a significant non-confirmation within the same index. It is a sign that the momentum is waning.  If you look at the ST Indicators on a daily chart of the DIA, you can clearly see the divergence in the ST Momentum Indicator since January.  However, both the momentum and the volume remain positive, and with positive indicators, I still can’t get too Bearish on the Dow …at least for now.

This is not the case for the NASDAQ-100 (QQQ) as the index generated a Sell Signal last Wednesday when the ST Volume Indicator turned negative and the momentum moved out of the Trend Zone.  However, while this is a Sell Signal, so far, the momentum remains positive, and until it turns negative, we could still see some back and forth trading action next week.

The S&P-500 (SPY) is also showing mixed signals. Its ST Volume Indicator has turned negative, but the momentum remains in the Trend Zone (just barely).

When I look at a 15 minute chart of the SPY since last Tuesday, I can clearly see five waves down from its high of 394.17 into Thursday’s low of 387.74.  Then from that low, there appeared to be an a-b-c rally into yesterday morning’s high of 392.38.  The seven bars that followed that rally were an impulsive decline, so it could be the initial stages of wave 3 down.  If this is the case, there should be more downside follow through next week.  On the other hand, and this is the dilemma, if yesterday’s high was only wave ‘a’ of the retracement from last Tuesday’s high, and Friday’s late pullback was wave ‘b’, this means the SPY will likely rally in wave ‘c’ up next week.  At this point, with mixed signals on the three major indexes, there is no way to tell.  A break of Thursday’s low of 387.74 would clarify the issue as it would eliminate any further Bullish potential.  A break of 31,285 on the Dow would do the same thing.

I should add that the overall picture was further complicated by yesterday’s breadth action.  Even though the Dow finished up slightly (less than a point), and the S&P and Q’s were both down, 7 and 1.45 points, respectively, the breadth on the NYSE was positive. Crazy huh?  Yep, the NYSE A/D ratio showed 1.9 stocks advanced for every decline.  Same for the up volume as almost 68 percent of the total volume was on the upside.  So, on a day when the three major indexes were pulling back, the breadth and volume numbers certainly did not provide the confirmation I was looking for.  BTW, the positive breadth numbers were enough to turn The Tide back to Neutral. The Dean’s List remains Positive.  

The DMI on the Dow turned positive on 5 February and remains Positive.  The Market Timing Indicator on the Dow (DIA) remains Positive. The same timing indicator for the NASDAQ remains Neutral. The Scalp Trading Indicators on the DIA remains Positive. The ST Indicator on the NASDAQ-100 (QQQ) has turned Negative.  Whenever I see mixed signals across the board like what’s happening now, it tells me that the markets are either starting a major change in trend or are pausing (resting) before attempting another run up.  Because of this, students should remain cautious and pay close attention to any change in signals.  

The Sector Ratio remained at 22-2 Positive after Friday’s session.  The top 5 strong sectors are Service, Banks, Media, Semiconductors, and Energy. The two weak sectors were Telecoms and Healthcare.  Continue to pay attention to the Sector Ratio as the week progresses.

The 0-98 Sell Signal kicked out by AIQ’s artificial intelligence algorithm on 12 February remains unconfirmed.  As I mentioned in the WSR, I continue to pay close attention to the ST momentum indicator, especially if the DIA begins to break below Thursday’s low of 313.38.

Model Update:   There were NO Changes to the Model.  It remains 100 percent in cash.

Top Stocks:  Students should note that several energy related stocks have moved into the top positions on the MWL.  During the week, we said good-by to several former top stocks as their momentum indicators moved out of the Trend Zone.  TDC, BIDU, and SBNY remain in Up Trends with each stock seeing nice gains on Friday.  During the week, I mentioned how we need to pay attention when the top stocks begin to show signs of weakening.  This is happening now.  Right now, 3 of the top 5 stocks on the MWL are energy related.  This tells me the nature of the beast (the market) is changing. My longer term charts for energy are positive.  The chart for West Texas Crude suggests it could rally from a current price of about 59 to the high 80’s later this year.  So, with CVI, HFC, and NBR now moving into the Top 5, I will be paying close attention.

One of the stocks I’m also watching is Tesla (TSLA).  That’s because its ST Volume Indicator turned negative on Friday with is momentum indicator already negative.  Students who took the ST Class know this is a Sell Signal.  TSLA was down 6.08 points on Friday.

I’m also watching Apple (AAPL).  While AAPL was up slightly on Friday, its ST Indicators remain negative.  The stock is now at a critical point with respect to its chart pattern as its now sitting on the right shoulder of a major H&S Pattern that has been developing since early January.  On Friday, the stock closed at 129.87.  Right shoulder support is at Thursday’s low of 127.41.  So, IF APPL begins to break below 127.41 next week, the pattern suggest it will decline close to the 110 level.  Again, the reason I’m watching AAPL so closely now is because is a major player on two major indexes.  If AAPL begins to decline (breaks 127.41), it will likely take all the major indexes with it.  Watch Apple.

Gold and Silver:  I don’t have anything to add to my recent comments.  I’m still watching the metals.

Bottom Line: Pay attention to Thursday’s lows.  If the DIA, SPY, and QQQ begin to break below 313.87, 387.74, and 328.36, you might want to start managing your money.  If all three of the major indexes break below these numbers, it would eliminate any further Bullish potential.  Same for APPL…watch the 127.41 level.  AAPL is a major key now to what will happen to the markets.  Pay attention.

Have a great weekend.

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

02-22-2021

DISCLAIMER

As always, the Professor never makes recommendations. The information is provided on an educational basis so you can have informed discussions with your financial advisors and/or accountants about your individual investment decisions.

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.