Weekend Strategy Review May 21, 2017
Posted by OMS at May 21st, 2017
The Dow rose 142 points on Friday, closing at 20,845. It was down 92 points for the week. The NASDAQ finished up 28 points on Friday and down 38 points for the week.
Friday’s rally from oversold conditions was the Big Move predicted by the small change in the A-D oscillator. It was likely all or part of sub-wave ‘c’ up within wave ‘C’ down of the sideways triangle that the Dow and SPX have been developing since early May.
If I’m right about the triangle, once Wave ‘C’ down completes near the 20,500 level, there should be a Wave ‘D’ rally to about 21,000 followed by a small Wave ‘E’ decline.
It will likely take until mid-June before all five waves of the sideways triangle are complete. After that, the markets should start their final Major Wave ‘E’ rally to a top into September-October. This rally should reach the 22,000+ level.
A move above 21,169 on the Dow would likely confirm that the summer rally is underway. This should be a very tradable rally.
Not so much for small cap stocks on the Russell 2K. They’re having a tougher time of it. Looking at the chart of the RUT, it appears that the index topped on 26 April and has completed the first two legs of a Major Wave 1 down. After topping, the RUT fell to 50-day moving average support near 1,380. Then after trading sideways along its 50 for nine days, the RUT broke below the 1,380 level and now appears to be headed toward support at its 200-day moving average near 1,322. If 1,322 is broken, the move would be a ‘Rope Jump’ which would tend to confirm the down move as Major Wave 1 down of a new Bear Market. This is why I’m paying so much attention the Russell now. If the RUT makes a downside ‘Rope Jump’, it would be a Major tell for what will likely happen to the Dow and SPX after they finish their summer rally.
BTW, new students should look at the small Hockey Stick Patten that developed on the RUT since 26 April. They should also measure the ‘Stick’ and try to determine the target for the move down.
Students might also want to look at the attached chart for the Dow. In particular, students should note how except for a brief period late April-early May, the 35-period CCI on Dow has been showing No Trend conditions. When this is happening, it means the market is consolidating. And the most likely pattern for a consolidation, especially after a wave 3 move up, is a wave 4 triangle. This is why the odds for a summer rally to 22,000+ are high. But we need to be patient! Triangles have 5 waves. We’re only working on the third wave of the triangle now.
Anyhow, while we’re waiting for the triangles on the Dow and SPX to complete, there are other trading opportunities available. My two favorites right now are the RUT and gold.
On Thursday, I mentioned that I was looking for a bounce in the RUT so I can fade the rally. This is exactly what I did. When the RUT reached the 1,370 level, I bought a few shares of TWM, the inverse ETF for the Russell 2K.
I also bought more gold. On Wednesday, after GLD made its ‘Rope Jump’, I talked about how it was overbought (2-period RSI at 99.3) and how it would likely pull back to moving average support to form another ‘Blade’ before moving higher. And that’s exactly what happened. On the day of the ‘Rope Jump; GLD was overbought and trading at 120. On Thursday and Friday, the ETF pulled back to a more reasonable 118+ level. The price was good enough for me. My target for the next leg up in GLD remains at 134+. I’m not gonna quibble.
I also bought a few more shares of GDX and GDXJ, two of my favorite gold ETFs.
One of the other things I have been doing for the past two days is selling naked puts. I don’t talk about this strategy, because it’s more for larger trading accounts. The margin required for selling puts would prohibit doing this in smaller accounts. But if you have the funds, the strategy can very profitable.
For example, if you felt the Dow and SPX were at the lower end of its trading range, like I did on Thursday, you can sell a few short-term naked Puts on oversold stocks or an index, and then let the market run away from those Puts like it did on Friday.
For those students seeking income, another strategy while you’re waiting for the market to complete a consolidation triangle, would be to sell Call options on the stocks you own. For example, an energy stock like CVX pays a 4.3 percent dividend yield. Since late January, the stock has either been in a down trend or no trend, as indicated by the CCI. During that time, CVX has fallen from 113 to the 104-105 level where its trading now. If you sold short-term covered calls on the stock each month for about a buck and let them expire worthless, you would have collected about 4-5 bucks premium. This would have offset a good portion of the decline.
However, IF you watched the 2-period RSI and sold the Covered Calls every time the 2-perior RSI was overbought AND then bought these Calls back when the stock became oversold, the results would have been a lot different. The strategy takes some work, because you’re constantly trading the Calls instead of holding them. But you can really juice the total yearly return.
I like to sell options with a 30-40-day time window. That way I take full advantage of the rapid time decay that takes place as the options near their expiration date. I hardly ever Buy options, because about 80-85 percent of the people who buy options lose money. That’s why I love to sell them.
Anyhow, the next time you see the market or your stock overbought and the CCI showing No Trend, think about selling a few Covered Call Options. It’s one of my favorite strategies while I’m waiting for the market to complete its consolidation.
Have a great weekend.
That’s what I’m doing,
H
BTW, Friday’s Sector Report only had 5 strong sectors. There were no changes to the top sectors. The Semis, Leisure, Computers, Healthcare, and Insurance Sectors continue to show strength with Autos, Specialty Banks, Real Estate, Media and Telecoms lagging. A few months ago, the Sector Sectors were dominating the weak ones by margins of 18-20 to 6-4. Now it’s the opposite; the weak sectors are in control. Students should watch this sector report closely as the market moves into mid-June. I have a feeling its gonna tell you where you want to be ;>)
Market Signals for
05-22-2017
DMI (DIA) | NEG |
DMI (QQQ) | POS |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEU |
SUM IND | NEG |
VTI | NEG |
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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.
Category: Professor's Comments, Weekend Strategy Review