Weekend Strategy Review November 4, 2018

Posted by OMS  at November 4th, 2018

As expected, the markets opened higher on Friday but could not hold their gains.  The early rally gave me an opportunity to establish a few short positions near the highs of the day which led to a nice scalp profit by the close.

The Dow finished the day down 110 points on Friday, closing at 25,271.  And even though it was down on Friday, it was still up 583 points for the week.  The NASDAQ was down 77 points on Friday, but up 190 points for the week.

OK, it appears that wave ‘b’ down of corrective Wave 2 up is underway.  This wave will likely complete somewhere between 24,850 and 25,050.  After that, the markets should resume their rally into and/or after the election. 

As I’ve shown on the attached chart of the Dow, once wave ‘b’ down completes, the shape of wave ‘c’ will either be a simple a-b-c wave or a more complex 3-3-5 Zig-Zag.  The reason I believe it could become a Zig-Zag is because Wave ‘a’ was a simple, straight up rally.  The Principle of Alternation suggests that anytime wave ‘a’ is simple, wave ‘c’ is usually complex.  This means that the wave ‘c’ rally will likely take longer to unfold, possibly into late November or even early December.  It shouldn’t change the upside target by much.  I’m still using 25,800+ for now.

Of course, there are no guarantees this will happen.  Tuesday’s election can change everything.  The Dow has already corrected 50 percent of its losses since its 3 October high of 26,951.  The large cap index is now overbought with NO Trend and is sitting just below resistance of its 50-day moving average.  In other words, IF the Dow is still below its 50 going into the elections AND the market does not like the results, the easier path is down.  The Dow has already broken through its 200-day moving average to the downside, so unless proven otherwise, I MUST assume the downside ‘Rope Jump’ was Wave 1 down of the new Bear Market.  This makes the recent rally part of retracement Wave 2 and NOT a new leg of the old Bull Market.  And IF the rally is part of corrective Wave 2 up, the next wave down should be an ugly, impulsive, destructive Wave 3 down.  Once it starts, it’s going to hurt a lot of investors.  They will be joining the commentators on CNBC and Fox Business News wondering ‘What happened?’

But you won’t. You know all about ‘Rope Jumps’ and wave counts.  You learned about them in Class. You know what to expect.  You also learned that the most likely shape of a corrective wave 2 is an a-b-c retracement.  But sometimes, under special conditions (like an election) the common a-b-c can morph into a 3-3-5 Zig-Zag.  And if this happens, the retracement could take longer.  But the one thing that the 3-3-5 retracement won’t change is the outcome.  Once Wave 2 completes, the market will start heading down again. 

So, IF you see either a simple a-b-c correction OR a more complex 3-3-5 wave pattern developing after the election, you’ll know what it means.  It will be telling you that Wave 3 down of the new Bear Market is getting close to starting.  In other words, protect yourself. If I’m right about this, Wave 3 down will drop the Dow below the 23,000 level, and has the potential to trade significantly lower. Also remember that IF the next wave down is Wave 3 down, it means that the decline won’t be complete until Waves 4 and 5 are complete.

The Sector Ratio remained at 6-18 negative after Friday’s session.  The six Strong Sectors were Service, Household Products, Media, FoodDrug, Telecoms, and Insurance.  All these sectors are defensive in nature.  They are NOT leaders.  The sectors that usually lead the market higher were all on the Weak List.  This should tell you something.  The Weak List is led by Transportation, Energy, Semiconductors, Cap Goods, Banks Financials, and Computers.  Hmmm?  When was the last time you saw a Bull Market start without them?  Doesn’t happen.  Won’t happen!!!

With sectors like the Banks, Financials, Semis, and Cap Goods leading the Weak List, it’s telling me these former leaders will likely take the market lower, not higher.  So be careful!

I also made a few gold trades on Friday.  Gold (GLD) remains on a Buy Signal.  The miners are still on a Neutral Signal.  However, as I said in my Comments on Friday, the VTI-volume indicator on GDX continues to improve.  Another day or so could generate a Buy Signal for the miners.  With the wave count suggesting that Major Wave 3 up is about to begin, wouldn’t a Buy Signal on the miners be nice? 

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

11-05-2018

FAQ

Only getting the Professor’s Weekend Review? Try his daily update Cum Laude service for 2 weeks only $9.99 LEARN MORE

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.