Weekend Strategy Review June 20, 2021

Posted by OMS  at June 20th, 2021

Stocks fell hard again yesterday as they continued the decline that started immediately after the Fed announced it would be raising interest rates within the next two years.  So, if just the threat of a rate increase dropped the Dow over 1,000 points in three days, I can only imagine what an actual rate increase will do?

The Dow finished down 533 points on Friday and was down 1,189 points for the week.  The NASDAQ lost 131 points on Friday and was down 39 points for the week.  The decline on the Dow took the index well below the lower support trend line of a rising channel that started last October.  It means that the large cap index probably topped on 10 May at 35,091 and has now started major Wave 3 down.   In Thursday’s Comments, I mentioned that my short-term target for the Dow was just under the 33,473 level.  Yesterday’s early decline stopped just under that level and proceeded to trade sideways before dropping to 33,283 at the close.  In Thursday’s Comments I also mentioned my next target area for the Dow was the 32,000 – 32,250 level.  However, after reviewing Friday’s action, I’m going to lower my target slightly to 31,650 to 32,100 based on a Fibonacci .38 percent retracement of the October low. The decline to my lower targets will NOT likely be straight down as there could be significant snap back rallies along the way. I do not expect that any of these rallies will exceed the 34,000+ level.  Also, any rallies now should be viewed as shorting opportunities.  

The S&P and NASDAQ also lost ground on Friday, but so far both indexes are still trading above their lower trend lines.  This means that the S&P and NASDAQ will likely continue to test and re-test their lower trend line support before throwing in the towel, just like the Dow did for the past two weeks.  The pattern on the S&P is slightly different than the Ending Diagonal on the Dow. It’s still and Ending Diagonal, but the final stage is more of a rounding top. Doesn’t matter, …Friday’s decline looked like the start of a wave 3 down withing a five wave down sequence.  Because of this, my short-term target for the S&P is near the 4,110 to 4,117 level.  After that, the index should re-test the ‘gap’ that formed on 1 April near the 4,020 level.  If the S&P begins a retracement rally, I do not expect it will exceed 4,250.  The index closed at 4,151 on Friday, down 81 points for the week.  

To be honest, I really don’t know what the pattern is on the NASDAQ. The recent rise into the 14 June high of 14,175 could be anything from a classic Ending Diagonal to an uncompleted wedge.  If it’s the latter, then it should be starting wave 4 down of a final five wave up sequence.  In other words, the NASDAQ might not have topped yet.  It could decline to the 13,500 level next week and then rally back to the 14,250+ (?) level.  Students should watch the area near 13,500 closely, because if the NASDAQ has not topped, it should decline to 13,500 and then rally.  If the decline doesn’t stop at 13,500 and starts to exceed 13,000, it would increase the odds that the final top is in. 

The Market Timing Indicators on the Dow and S&P are Negative.  The Timing Indicators on the NASDAQ remain Positive.

The Scalp Trading Indicators for the Dow (DIA) turned Negative on 15 June and remain Negative.  The same indicators on the S&P (SPY) are Negative.  The ST indicators on the NASDAQ-100 (QQQ) remain Positive. 

The Dean’s List remains Neutral as QQQ is still on the List.  BTW, have you noticed how short the Dean’s List has become?  Hmmm?  The Tide remains Negative.

Here’s the Big Change for the week…. The Sector Ratio weakened to 5-19 Negative.  This is the first time in well over a year that the Ratio as more sectors moving to the downside than up. Many of my students have never seen a Negative Sector Ratio, so they really don’t appreciate its impact.  For over a year, they have mostly seen a ratio that had positive numbers near 20.  I can only remember one time that it even hinted at turning negative with a number near 17 positive.  But now its negative.  Really negative.  This should tell you something about the state of the current market. Think of the Sector Ratio as being a similar to the moves of a glacier. It moves slowly, but destroys everything in its path.  

The top 5 strong sectors were PharmaBio with an RS rating of 4, Service (3), Energy (1), Computers (0) and Healthcare (0).  The top five weak sectors were Banks (-3) Transportation (-2) Consumer Products (-2) Real Estate (-2) and Media (-1). Continue to watch for increasing weakness in the Sector Ratio as the week progresses.

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

Top Stocks:  Like I said in Thursday’s comments, now that the Market Timing Indicators on the Dow is negative, I don’t really want to fight the signal.  I’d much rather look for stocks to short from the Weak List or trade inverse ETFs, like DXD or SDOW.  BTW, these two indexes, especially the highly leveraged (3X inverse) SDOW were relatively easy trades since last Wednesday using the ST Indicators on the short-term bars. All you had to do was enter the trade every time the indicators on the Dow turned negative.

Also, Caterpillar (CAT), the top ranked Dow stock from last Wednesday’s Weak List (#7 overall) fell 7.71 points on Thursday before finding a bid 4 points lower on Friday.  The momentum stayed below zero almost the entire day on Thursday making for another easy short.

Friday’s Weak List is still lacking a lot of Dow stocks, with CAT being the only one at the #10 position.  Because of this, I’m going to pass on trading weak stocks and focus on the inverse index ETFs instead. 

I’m still watching GSG, the commodity indexed ETF as a potential short. GSG fell 0.40 cents on Thursday, but then recovered 0.15 cents on Friday pushing its ST volume indicator back above the zero line.  The commodity ETF has a clear Three Highs to a Top (THT) Pattern, so now that the DMI has turned negative, it’s another reason the watch it as a short.  The reason I continue to mention GSG is because it tends to move slooooowly, something that most inverse index ETFs do not do.  Also, once the trend changes in commodities, it tends to stay that way for a while. New students might want to check out GSG as a vehicle to learn about trading short positions.  Just make sure you use the ST indicators and follow the rules.  As of Friday, the ST indicators on the daily bars on GSG are still positive.  Be patient!

Gold: Gold (GLD) took another hit on Friday dropping 0.92 cents to 164.93.  got hit hard yesterday dropping 2.94 points to 171.11.  Gold (the metal) is now approaching a lower trend line that extends from June 2019.  The declines that occurred in March 2020 and March 2021 have been supported by this trendline which is now near the 1,730.  If gold stays above its trendline, the odds favor another rally.  However, IF trend line support does not hold, gold could be in for some rough sledding.  I’m avoiding gold for now.  

Bonds:  TMF rose 1.41 on Friday and had now gained 2.57 points since Wednesday’s Fed announcement.  The rise still looks like a wave 4 counter trend rally from the 18 March low.  If I’m right about this, Bonds should begin to fall in the weeks ahead, as interest rates rise.  The next wave down in Bond prices should re-test the March lows. Friday’s Bond rally drove interest rates down to 2.00 percent.  If I’m right about the pattern, we could see interest rates on Bonds rise to about 2.6 to 2.8 percent in a few months.  That by itself could wreak havoc with 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

06-21-2021

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.