Weekend Strategy Review May 16, 2021

Posted by OMS  at May 16th, 2021

Lots of volatility in the market this week.  After dropping over 1,500 points early in the week, the Dow rallied on Thursday and Friday to recover almost half of its loss.  The other major indexes followed suite although the NASDAQ only recovered about a third of the loss from its high. The broader S&P was perhaps the most interesting index to watch as it also rallied off Wednesday’s low slightly exceeding the 4,100+ level I was using as a place to establish a few short positions. The S&P got as high as 4,183 on Friday before pulling back to close at 4,174.

From a pattern perspective, the late week rally appeared to be a 3-3-5 flat retracement which makes it wave 2 up of the overall Bearish pattern.  This suggests that wave 3 down will start sometime next week.  It’s possible that Friday’s rally on the S&P completed wave ‘c’ up in the 3-3-5 pattern for Wave 2, as it consisted of five waves.  If the pattern is not complete, wave 2 up could trade back up to Friday’s high and be stopped by the gap that occurred on 10 -11 May near the 4,188 level.  The Japanese call the filling of gaps ‘closing the window’.

I still believe that short or inverse positions established near this level will be handsomely rewarded.  A decline below 4,130 on the S&P will suggest that wave 3 down is underway.  If that break occurs, the next decline should test the 3,900 to 3,910 level, possibly lower.

The wave 2 up targets I’m using for the Dow are between 34,420 and 34,500.  The Dow got as high as 34,454 on Friday before pulling back to close at 34,382.  So, I would consider anything close to Friday’s intraday high as a good place to short the industrials.  The rally does not have to happen as wave 2 up could have completed on Friday.  I’ll be watching the Scalp Trading Indicators on the short-term (10 to 15 min bars) as my trigger.

The retracement rally on the weaker NASDAQ also appears to be nearly complete.  Friday’s rally was a near perfect 0.382 percent Fibonacci retracement of Wave 1 down (29 April into 12 May).  The Composite closed at 13,430 on Friday.  A break of 13,200 would suggest that wave 3 down is underway.  If 13,200 is broken, the next move down should be well below the Major wave 1 low of 12,397 made on 5 March.  My intermediate target for the Comp is near the 11,700- 11,800 level, with 11,500 possible.

The Market Timing Indicator for the Dow is Neutral.  The same indicator on the NASDAQ remains Negative.  The ST Indicators for the Dow (DIA) and S&P (SPY) have reversed and are now Positive. The ST Indicators for the NASDAQ-100 (QQQ) remains on a Sell Signal.

Students should pay attention to the key support levels mentioned above AND the indicators as the week progresses.

The Dean’s List and The Tide are Neutral.

The Sector Ratio strengthened to 22-2 Positive after Friday’s session. The top 5 strong sectors were Material, Transportation, Service, Banks, and Food Drugs.  The thing I noted about the strong sectors is that most of the RS Ranking in Strong Sectors are mostly 1s, 2s, and 3s which does not suggest great strength. The two weak sectors were Semiconductors and Media.  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.

Top Stocks:  Most of the Top Stocks from Wednesday’s List were little changed by Friday. Most were energy related and had experienced large rallies earlier in the week because of the Colonial Pipeline shutdown.  So, these top energy stocks mostly consolidated on Thursday/Friday.  Even the top miners were relatively flat.  Students should note that the Top Stock List has been dominated by energy and mining stocks for the past week or so.  When 19 out of the top 25 stocks on the MWL (5/12) are either energy or mining related, it tells me the market has a very narrow focus. This is NOT something you want to see if you’re still Bullish.  

Gold:   Gold (GLD) gained 1.56 on Friday to 172.69 breaking out of its small consolidation triangle.  As I mentioned in previous comments, gold should make one more push higher, probably to the 174-175 level before starting its next major leg down.   This push higher should take gold (the metal) to the 1860 to 1870 level.  If this doesn’t happen, a close below 1,800 would suggest the a-b-c upward correction on gold is complete and that lower prices are in the cards. 

Bonds:  Bonds rose slightly on Friday with TMF gaining 0.61 cents to 22.74.  I’m still bearish on Bonds as I believe the small rally during the past few days is part of a wave 2 retracement.  Once the rally completes, Bonds should start a decline that will test the 18 March low of 20.91.  If 20.91 is broken, Wave 5 down could take Bonds back to the February 2020 lows.  A move above the 7 May high of 24.61 on TMF would suggest that Bonds are developing a more complete Wave 4 pattern before Wave 5 down begins.  Either way, I still don’t like Bonds here.  I believe there are much better trading opportunities (shorts) in the equity markets.

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

05-17-2021

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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.

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