Weekend Strategy Review November 1, 2020

Posted by OMS  at November 1st, 2020

The markets fell hard again on Friday, but a late rally recovered a good portion of the early loss.  Dow finished with a loss of 158 points, closing at 26,502. The large cap index was down a whopping 1,834 points for the week.  The tech heavy NASDAQ lost 274 points on Friday and was down 637 points for the week.

Early Friday, I talked about how the Dow would likely retest Thursday’s low IF the decline were part of five wave pattern to complete Wave B down of the Bullish Scenario.  That happened.  Trust me, … I was REALLY paying attention during the last hour of trading as it was extremely important for the Dow to hold Thursday’s low and then rally back above the 26,500 level.  This also happened.  The last hour of trading saw the Dow gain 358 points, from a low of 26,144 to close at 25,502.  Wow!

I used my SC Indicators to trade that rally on the short-term, 3 min bars.  There was plenty of positive divergence on the momentum indicator and the volume indicator produced a perfect entry point.

OK, so where are we now?  Well, it’s likely that some type of short-term bottom is in.  From a wave count perspective, Friday’s decline completed Wave 5 of Major Wave B down, with Major Wave C up due next.  Again, this is the Bullish Scenario I have been writing about for the past week.  The pattern, in my opinion, suggests a Trump win on Tuesday.

On the other hand, there is still an extremely negative pattern on the Board that could unfold IF the Democrats are successful.  Under this pattern, the past week’s decline into Friday’s low is only Wave 1 down of an extremely Bearish Scenario. If this scenario is occurring, the markets will likely begin to rally early next week in a retracement wave 2, but then begin to crash after the election.  My immediate downside target in this scenario is near the 24,800 to 25,000 level, with even lower prices likely. The reason these lower prices are possible is because under this scenario, the next major wave down would be a wave 3 down.  So, if wave 1 down, which appears to have completed on Friday, was 2,814 Dow points, wave 3 down should be at least 1.5 times that number or 4,221 Dow points.  So now you know why I’m calling this the Doomsday Scenario.  At this point, truth be told, I don’t really know if this scenario is related to a Biden win or not.  It could happen with a Trump win.  All I’m telling you is that this scenario, a scenario I wrote about earlier this year, is still alive and well and I MUST make my students aware of it.

Here’s what I’ll be watching going into the election:  If the Bullish Scenario is taking place, the Dow should hold yesterday’s low (there’s no need for a re-test anymore) and begin to rally.  The rally should carry the Dow back to the 26,600 to 27,000 level. There is a big gap (resistance) between 27,000 and 27,400 which will likely be filled, but it will take some time for this to occur.  Then once the gap is filled, the Dow should begin a significant rally back above the 30,000 level pushing on to new highs.  In my opinion, the only way this Scenario can happen is with a Trump victory.  I just don’t see how raising taxes, repealing regulations, ending fracking, etc., all the things being proposed by the Democrats, will grow the economy.  I could be wrong, but that dog just doesn’t look like it wants to hunt. 

So, if we get a small rally going into the election and the follow through is limited, it would set-up the Doomsday Scenario.  That’s because a small retracement rally would likely form the Blade of a negative Hockey Stick Pattern that would set up a wave 3 down or the crash wave.

Students should understand that both scenarios are possible.  I find it interesting that these completely opposite scenarios are occurring at a time when the media is saying the Presidential polls are just about even.  Usually when I develop my scenarios, based on Elliott Wave Theory, they are variants of either Bullish or Bearish Patterns. They usually only differ in the extent of the rally or decline or the time it will take for the patterns to develop.  But not this time.  This time the patterns suggest either a sustained rally or a market crash that will last 3-4 years.  One or the other, and this probably has a lot to do with next Tuesday’s election.  Right now, there is a lot of Red on the cockpit.  But students should also note that there was a small change in the A-D oscillator on Friday.  Small change signals usually mean that a Big Move will occur within the next 1-2 days.  I wouldn’t be surprised if we get another small change signal on Monday or Tuesday.  That would set-up a Big Move after the election.  We’ll see.  Should be interesting.

The Market Timing Indicators for the Major Indexes are Negative. 

The Dean’s List and The Tide are Negative. 

The Daily Scalp Trading Indicators on the Dow (DIA) and QQQ are Negative.  The same indicators have turned Negative on Apple (AAPL).  So now we have a condition where my Scalp Trading Indicators are all Negative.  The only good news is that Friday’s low held…and that could be a BIG DEAL!

The Sector Ratio was at 7-17 Negative after yesterday’s session.   The top five strong sectors were Transportation, Banks, Autos, Retail, and Utilities. The top five weak sectors were Energy, Computers, Media, FoodDrugs, and Service.

There were NO Changes to the Model after yesterday’s session.  The Model sold it shares of GLD on Thursday and is currently 100 percent in cash.  The Model also sold its long position in the Q’s on 12 and 14 October at 295.70 and 293.24.  Yesterday the Q’s closed at 269.38.  The Model will look to re-enter the Q’s when the Scalp Trading Indicators turn positive.  Right now, there is NO Divergence in the indicators, so the Model will likely remain in cash until after the election.  Be patient and continue to protect yourself.

That’s what I’m doing.

Happy Halloween!

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

11-02-2020

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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.

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.