Weekend Strategy Review July 18, 2021

Posted by OMS  at July 18th, 2021

In last Thursday’s Comments, I discussed how the Dow would likely pullback to the 34, 600 level before starting its final rally to a top.  At the time of the Comments, the Dow was trading at 34,933 so a pullback to 34,600 was just over 330 points.  So, yesterday’s decline of 300 points to a low of 34,647 was no surprise.  It was likely part or all corrective wave 2 down within a five wave sequence to the Dow’s final top.  The reason I believe yesterday’s decline is part of a wave 2 and not the start of something bigger is because the decline that started from last Wednesday’s high was not impulsive.  If you look at a 15 minute chart of the Dow, you can clearly see that the decline took the form of an a-b-c pattern, which is characteristic of a wave 2.  So, it’s likely that once wave 2 down completes, the Dow will resume its final rally to re-test the 10 May high of 35,091.

BTW, just after yesterday’s open, the Dow rallied to 35,090, which was only a point shy of its 10 May high before starting to fall. In previous Comments, I discussed how the Dow would likely re-test the 35,091 level before starting its major decline, so seeing the re-test was also something I have been expecting.  However, now that this has happened, we need to start being cautious.  That’s because I also said the final five wave pattern for Wave ‘E’ up can also truncate.  It does NOT have to reach the 35,450 to 35,600 level I’m projecting for its final target. 

Yesterday’s decline DID NOT change the Market Timing indicators.  The Timing Indicator for the Dow remains Positive. The Timing Indicator for the NASDAQ remains Neutral.  If these indicators turn negative, it would be cause for concern.  Remember, one of the reasons we’re paying close attention to the indicators now is because investor confidence is at the highest level since October 1987, just before the market crashed.  There are now four times as many bulls in the market as bears.  That’s EXTREME!

The Scalp Trading Indicators for the Dow (DIA) remains Positive.  The same indicators for the S&P (SPY) and NASDAQ-100 (QQQ) have turned Neutral.     

The Dean’s List remains Neutral.  The Tide remains Negative.

In Thursday’s Comments, we saw the Sector ratio weaken to 12-12 Neutral.  After yesterday’s session, the Sector Ratio fell to 4-20 Negative.  It’s been a long time since we’ve seen the Sector Ratio this negative.  The top four strong sectors were PharmaBio (2), Household Products (2), Computers (2) and Services (1).  Students should note how the RS ratings of the strong sectors continues to weaken with the top sectors now only 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.  With Covid19 still on investors minds, its not surprising to see PharmaBio with the highest RS ranking.  But when people start buying toothpaste and toilet paper stocks, you need to take note.

The top five weak sectors were Banks (-5), Energy (-5), Material (-4), Transportation (-3), and Media (-2).  Continue to watch for weakness in the Sector Ratio as the indexes complete the final waves of their Bullish patterns.

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

Top Stocks:  Most of the top stocks from Thursday night’s MWL were not buys after the market opened on Friday.  The only exception was Apple (AAPL) which opened over a point higher before starting to decline with the market.  Computers remain one of the strongest sectors in the market now, but even Apple is starting to look tired since its ST indicators turned positive on 14 June.  At the time, AAPL was trading at 130.48.  Friday it closed146.39 after reaching an intraday high of 149.76.  The ST indicators on AAPL remain positive, but students should watch for an exit signal if the momentum moves out of trend zone. 

Same for other large tech stocks, like Tesla (TSLA). Tesla is no longer the darling it was earlier this year when it was regularly among the top stocks.  During the week, the ST volume indicator on the stock turned Negative with the momentum indicator approaching the zero line.  Intel (INTC) is in the same boat, even with computers being the third highest ranked sector.  The stock has formed an inverse Hockey Stick Pattern since it topped in early April.  The 15 point ‘Stick’ projects a downside target near the 43 level, which is where the stock was trading last October. The ST indicators on INTC are now negative.

Gold:  Gold (GLD) fell 1.66 points on Friday to 169.41   The metal appears to be in the process of completing a counter-trend rally that started on 29 June.  That rally could have completed with Thursday’s high.  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. Once the decline completes, the pattern for gold will become bullish.  The Cup and Handle pattern I mentioned in Thursday’s Comments is still the dominant long term pattern.  This pattern projects a target of over 3,000+ for the metal in the months-years ahead.

Bonds:  Still no change in signal for Bonds…. but we could be getting close.  Bonds still appear to be completing a retracement wave 4 that started from the 18 March low.  The past few days of rally in bonds appears to be an upward a-b-c correction or flat pattern, which suggests bond prices will decline next week.  Right now, the Timing indicators for Bonds (TMF) remain positive.  If they turn negative, I’ll start buying TBT, the inverse Bond ETF.  The next move down for Bonds could be a good one…. a wave 5 down.  Wait for the signal to change. BTW, a wave 5 decline in Bonds would mean interest rates are rising, something that could have a significant impact on the equity markets.

Have a great weekend.

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

07-19-2021

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