Weekend Strategy Review March 21, 2021

Posted by OMS  at March 21st, 2021

After completing the final sub-waves of Wave 5 up last Tuesday and Wednesday, the Dow started its decline on Thursday which continued into Friday. The decline was a five wave affair that appeared to be wave 1 down.  After reaching a low of 32,505 just after the open, the Dow rallied for most of the day which appeared to be part or all of retracement wave 2 up.  A 200 point impulsive decline in the final 20 minutes of the day could have been the start of wave 3 down of Major Wave 1 down.  We’ll just have to see what happens when the markets re-open on Monday.

Friday was a ‘triple witching’ day for options expiration.  Most times, when the market is positive for the month prior to a triple witching expiration, it tends to trade down the following week.  So, both the pattern and history suggest the market could see lower prices next week.  If Friday’s early rally did not complete wave 2 up and was only wave ‘a’ of the pattern, I would not expect wave ‘c’ up to go much beyond the 32,900 level before wave 3 down starts in earnest.  By the time wave 3 down completes, the Dow should be trading below the 31,700 level.  A decline to this level would confirm that the Bear Market is underway and project a re-test of the 5 March low of 30,548 before all five waves of Wave 1 down are complete.

The NASDAQ also appears to be starting its Bear Market decline.  After reaching a lower high of Wednesday, the tech heavy index declined for the past two days.  However, the decline was not impulsive, so it could mean that wave 3 down has not started yet.  If this is the case, the NDX could see a small rally early next week to complete wave ‘c’ of wave 2 up before the selling resumes later in the week.  My short-term target for the NASDAQ is also the 5 March low of 12,397, with the intermediate target being the 21 September low of 10,519.   

Tesla (TSLA) one of the stocks I have been highlighting as a classic short, because of its clear five wave pattern since the March 2020 lows, was down 39 points during the week. The stock is currently forming the ‘Blade’ of an inverse Hockey Stick Pattern on its weekly chart.  The Blade of a Hockey Stick is usually a retracement wave 2, so once it completes, wave 3 down should begin by breaking below the 5 March low of 539 dropping the stock to the November 2020 low support near 400.

 Apple (AAPL) appears to be in the same boat. The stock topped during the week of 29 January and has been developing the initial waves of its decline ever since.  The Market Timing Indicators on AAPL remains on a Sell Signal with an initial target near the 103 level.  The weekly 200-day moving average on APPL is near the 72-73 level and continues to be my intermediate term target. APPL closed at 119.99 on Friday.

So, with the NASDAQ-100 tracking stock (QQQ) and two of its major components currently on Sell Signals, we need to start focusing on the downside.  BTW, event although I don’t talk about some of the other FAANG stocks, several of these are also on Sell Signals. NFLX came out of the Trend Zone in late January.  It reached a high of 503 on 20 January’ now it at 512.  Alphabet (Google), GOOG, is now at 2,043 after reaching its high of 2,152.  So, we’re starting to see the stocks that led the NASDAQ higher for the past few years starting to show signs of weakness.  Like I said many times, no stock, no matter how good goes to heaven.  Stocks go to targets, and just like other stocks, they do it in five wave patterns. These patterns are now in the process of completing, and you can easily see them on their weekly charts.  If you do anything this weekend, please look at the weekly chart of precious super star TSLA. 

BTW, while I’m at it, I want to say a few words about the rise of TSLA and the FAANGS.  The reason I continue to talk about TSLA is because it was the poster child for Electronic Vehicles (EV) and Autonomous Vehicles.  No don’t get me wrong…I honestly believe that EVs and AVs are the future of transportation in America.  But clearly, the hype generated by TSLA and other stocks in this sector is not justified.  They are way overpriced.  These stocks and others got caught up in a market where investors are no longer concerned about the basics.  Things like sales and revenue no longer matter.  Last week I talked about how the volume on the OTC has risen to astronomical levels in just a few short months.  We’re seeing battery stocks like Blink Charging (BLNK), go from 10 to 65 in 3 months.  BTW, BLNK has no earnings, no revenue, and doesn’t expect a profit for three years.  Yet at its high was worth more than GM.  Go figure!  Goldman Sachs has a chart that shows how non-profitable stocks, stocks that have no earnings whatsoever, have risen four fold in the last year alone.  So BLNK is not alone.  That’s scary!

All this is happening now when the market is trading at its highest valuation in history!   Yeah, the kids are saying ‘it’s different this time’.  But every time the market had valuations near current levels it tanked.  EVERY TIME!!!   It tanked in the early 1900s when valuations were well below current highs, then again in 1929, again during the Go-Go era of the 60s, then again in the Dot Com and mortgage peaks of the 2000s.  So now its 2021 and valuations are once again not only at historically high levels, they’re at new record high levels.  So, we’ll see if ‘it’s different this time”.  I was around during most of those valuation peaks, and for me…well, I’m betting otherwise. 

BTW, I’m also seeing other historically crazy stuff, like money going into leveraged ETF assets.  Investors are no longer content to just own stocks.  Now they want to own 2 and 3 times leveraged ETFs on the S&P, NASDAQ, RUT and Dow.  The amount of money going into these assets has tripled in the last year alone.  It’s crazy!

Another sign of the market is over-hyped is the increase in IPOs.  Remember what I used to say in Class when I talked about IPOs.  Most owners only sell their company when they believe it has peaked. If they saw more growth, they wouldn’t sell.  When they realize the future of their company is limited, and they want out.  Last month, volume in IPOs reached a historic annual peak of $178 Billion.  This volume is more than double previous volume peaks.  So, the owners are selling…and selling fast!  Same for most officers and company insiders.  The ratio of insider selling to buying is now near 8, about double the historic ratio we saw in the past 30 years.  The insiders also want out!!!!

Even more crazy is the increase in new SPACs.  Special Purpose Acquisition Funds or SPACs are basically blank check companies.  You give them your money and they decide what they are going to invest in.  They don’t have to tell you anything about what they’re going to invest your money in.  Just trust them.  This type of nonsense investing was almost unheard of during the past 10 years with new SPACs running about 10 a month.  But since last year, the number of new SPACs has increased to about 100 per month.  Heck, even Alex Rodriguez (A-Rod) has one called SLAM.  He says just give him your money and he’ll invest it in things related to sports and entertainment.  You trust Alex…right?

Anyhow, I hope you get my point.  The market is EXTREMELY overvalued and over hyped.  The patterns on the major indexes suggest that a major top is in place and are now starting to roll over.

Students should continue to note that there is an official Hindenburg Omen on the Board.  This means that the probability for a general market crash remains high.

The Market Timing Indicators on the Dow have turned Neutral.  The same Timing Indicators on the NASDAQ remain Negative. The Scalp Trading Indicators on the DIA remain Positive (just barely), while the same indicators on the NASDAQ (QQQ) remain Negative.  

The Dean’s List remains Neutral. The Tide has turned Negative after yesterday’s session. 

The Sector Ratio weakened to 21-3 Positive after Friday’s session.  The top 5 strong sectors were Retail, Media, Energy, Cap Goods, and Autos. The three weak sectors were Semiconductors, PharmaBio, and Computers. Continue to look for changes to the Sector Ratio as the week progresses.

Model Update:   There were NO Changes to the Model.   It remains 100 percent in cash.  Remember, the Model is based on the NASDAQ-100 (QQQ) and right now the Q’s remain on a Sell Signal.

Top Stocks:  Even though the Dow closed 230 points lower on Friday, William-Sonoma (WSM), the Top Stock from Thursday’s MWL gained 13.27 points!  Now that’s impressive!  As a matter of fact, 4 of the top 5 stocks on the List were winners on Friday, the lone exception being US Steel (X) which pulled back 0.24 cents.  That is also impressive on a day when the Dow lost 230 points. Just remember, the market appears to be rolling over, so make sure you pay attention to the ST momentum indicator when trading the Top Stocks.  When the momentum moves out of the TZ, the party is over.   Once the ST volume indicator on the Dow turns negative, I’ll start posting top stocks from the Weak List.  But for now, stocks of interest as potential shorts include #1 WKHS, #2 TAN, #3 DDD, #4 TSLA, #12 EA and #20 APPL.

Gold and Bonds:  No changes.  I’m still watching.

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

03-22-2021

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.