Weekend Strategy Review May 23, 2021

Posted by OMS  at May 23rd, 2021

The past two day of rally helped clarify the wave structure in all the major indexes.  If you recall in Thursday’s Comments, I talked about the possibility that indexes could rally off the 12 May low to form an a-b-c pattern to complete wave 2 up.  That rally happened despite the low odds that I gave it.  It might have been the last gasping breadth of the great Bull Market that started back in March 2009.  We’ll see.

The reason I’m Bearish now is because of the pattern and indicators.  As you know, my entire Methodology for trading the markets is based on patterns, indicators, and Lists.   Since making its high of 35,091 on 10 May, the Dow fell to a low of 33,555 on 12 May. The decline consisted of five distinct waves, so it was likely Wave 1 down.  The retracement rally that started from the 12 May low consisted of three waves, with waves ‘a’ and ‘b’ being complex (a-b-c), and wave ‘c’ being simple.  It followed the classic principle of alternation for a retracement wave.  Also, wave ‘c’ up on the S&P was slightly higher than wave ‘a’ which is exactly what once would expect.  

While all this pattern development was going on, the indicators stayed mostly negative to neutral.  Again, something you would expect to see during a retracement wave.

Even more classic is the short-term Head & Shoulders pattern that formed on the Dow and S&P.  The rally that occurred off Wednesday’s low appeared to be the right shoulder of that pattern, making the 19 May low of 33,474 the neckline. The pattern can be clearly seen by looking at an hourly chart of the Dow and SPY.  So now that the neckline has been established, we can start making a few projections for next week.

The distance from the Dow’s high (the head) on 14 May, to its 19 May low, is 972 points.  So, IF the neckline at 33,474 is broken next week, the Dow should fall to 32,502 (33,473 – 972 = 32,502).  That’s my new intermediate target.  BTW, the 32,500 level is also where the 200 day moving average is currently located, so it’s a natural target.

However, because the decline would be part of Wave 3 down, it could drop a lot lower.  The first support level after 32,500 is the 4 March low of 30,547.  After that it’s the 29 January low of 29,856.  If either of these lows is broken, the next support level is 26,143, where the Ending Diagonal for Major Wave 5 up of the rally began. 

So, what I’m telling you this weekend is that the 33,500 is important!   The patterns suggest that Waves 1 down and 2 up are now complete.  Wave 3 down should be next.  If the ST Indicators turn negative next week, pay attention! 

I’m still using the 3,900 to 3,910 level on the S&P as my initial target, possibly lower, and 11,700-11,800 on the NASDAQ, with 11,500 possible.

The Market Timing Indicator on the Dow are Negative.  The same indicator on the NASDAQ remains Negative.  The ST Indicators for the Dow (DIA) and S&P (SPY) are Neutral after yesterday’s session.  The ST Indicators on the NASDAQ-100 (QQQ) remain Negative.

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

The Sector Ratio fell to 19-5 Positive after Friday’s session.  This is the largest decline in the Ratio in several months.  The top 5 strong sectors were Service, Autos, Leisure, PharmaBio and FoodDrugs.  Most of the RS Ranking in Strong Sectors remain weak, now mostly 0, 1s, and 2s, which does not suggest much strength. The four weak sectors were Media, Telecoms, Retail and Utilities.  Continue 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:  Dillard’s (DDS), the Top Stock from the Thursday’s MWL, was up 4.64 points on Friday.  It made for a nice day trade as it opened at 130.38 rising to a high of 137.56 before pulling back.  #2, Three D Systems (DDD) also had a nice day, closing 2.19 points higher.  The miners in positions #3-5 were mostly flat as gold continues to stay above its Upper Trend Channel.  The past four days of trading activity in the miners suggest a consolidation is taking place.  If so, gold and the miners could be heading significantly higher.

Weak List:  Here’s something to think about:  The Dow closed 123 points higher on Friday, yet 8 out of the 10 stocks I mentioned in Thursday’s Comments as weak stocks were down on Friday.  The only two that didn’t go down were ABMD and T. 

Here’s the Top Ten from Friday’s Weak List: WKHS, TSLA, THO, SAM, CNI, LEN, BIDU, ABMD, MU and WSM.  Always check the ST Indicators before trading.  For example, ABMD is not a candidate now because its ST volume indicator is positive.   As a learning experience, students should compare the pattern and indicators between ABMD and TSLA.  Can you spot the Major H&S Pattern that has developed on TSLA for the past six months?  Hmmm?  Another reason I’m Bearish on the market.

Gold:   No change from Thursday’s Comments. Gold is at a major crossroads now.  Pay attention the ST Indicators!  If the miners stay at the top of the MWL and the indicators remain positive, there’s a good chance that Wave 3 up is starting.

Bonds:  The pattern still suggests that Bonds are working their way through a small sub-wave 2 up retracement within Wave 5 down.  They could still have a bit more upside to go before Wave 5 down begins.  I still don’t like Bonds here.  I believe there are much better trading opportunities (shorts or inverse ETFs) in the equity markets.

Something to think about: The patterns and indicators suggest the market is at a critical place this weekend. You might want to take some time to review your portfolio and refine your plan to protect it IF the market starts to break down.

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

05-24-2021

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.