Weekend Strategy Review October 18, 2020
Posted by OMS at October 18th, 2020
The markets were mixed on Friday. The Dow finished with a gain of 112 points, closing at 28,606. The large cap index was up 19 points for the week. The tech heavy NASDAQ lost 42 points on Friday but was up 92 points for the week. The markets continue to trade as if they are approaching important tops.
For the past two weeks, I have been talking about two scenarios for the Dow. The first scenario was a Wave 2 where the index would finish near the 3 September high of 29,199 before the next impulse wave lower, Wave 3 down would start. The second scenario, a Wave 5 up, would see the Dow trade close slightly above the 3 September high, then pull back before resuming a push toward the 30,000 level, with 30,300 possible. Both scenarios had equal probabilities.
OK, the markets rallied like I expected but the real question is will that rally continue? Here’s what I’m seeing:
Friday’s intraday rally on the Dow got as high as 28,842, so it remains below the 3 September high. It also stayed below last Monday’s high of 28,838, which filled the gap down just after the 12 October high of 28,958. In other words, the rally from 15 October low of 28,182 could be interpreted as a ‘filling the gap’, something that often happens on a retracement wave just before another move down begins. So, the Wave 2 scenario is still alive and well as next week approaches. If Wave 2 completed last Monday, the rally we saw into Friday could have been a 660 point retracement wave. This would mean that Wave 3 down would likely start sometime next week. An impulsive decline below the 15 October low of 28,182 would confirm that Wave 3 down is under way.
On the other hand, the Wave 5 up scenario is not dead yet. For this scenario to stay alive, the Dow MUST exceed the 12 October high of 28,958 next week and move above the 3 September high. This would set the stage for a push to the 30,000 level into the November election….at least for the Dow and S&P. The story on the NASDAQ is a lot different. It’s one of the reasons the Model sold its shares on QQQ late Friday after purchasing them earlier in the day.
Friday’s intraday rally on the NASDAQ failed to get anywhere close to its recent highs on a day when its sister indexes were experiencing a large rally. This suggests significant underlying weakness. My primary pattern for the NDX suggests that Wave 5 up topped on 3 September, making the series on waves that have occurred since that high a wave 1 down and a wave 2 up. So, if the NASDAQ begins to move down early next week, it could be the start of wave 3 of Wave 1 down. A close below yesterdays low of 11,765 would support the bearish case. A Wave 3 down should see the NDX test the 10,677 level. If that level is broken, the June wave 4 lows between 9,000 and 9,500 appear to be likely targets.
On the other hand, IF the NDX exceeds last Monday’s high, it’s likely the techs will rally to a new all-time high somewhere slightly above 12,500.
So, with two unclear scenarios on the Dow and a potential Wave 3 down pattern shaping up on the NASDAQ, you can now understand why I’m concerned and on the sidelines. Two weeks ago, I said the Dow would rally for the next 8-10 days. This has happened. Now it’s time to re-evaluate. What I’m seeing now is NOT a clear picture. Students using my Scalp Trading indicators can see this for themselves by looking at the volume and momentum indicators on a Daily chart of the QQQ. The volume is negative while the momentum is still positive. The chart for the SPY depicts a similar picture. The Dow (DIA) is slightly different as it currently shows positive indicators, but the volume is only slightly positive. This could change in a heartbeat.
BTW, whenever the Daily Scalp Trading Indicators are mixed, like they are now, students should be conservative with their trades. Mixed indicators tell me that the markets are either consolidating or getting ready to change direction. Neither of these phases are conducive to making money. This is a time when students will likely lose money. When the indicators are mixed, the odds are not in your favor. You will likely get whipsawed, and this will cause you to question your ability to trade. So, don’t let this happen to you. Mixed ST indicators tell you to lighten up on your trades (smaller quantities) and IF you MUST trade, use shorter time periods. This is where I use a 4 day 7 min chart using high cover on the 30s as a guide. Mixed indicators also tell me that its unwise to hold large positions overnight. Remember this as we move into next week.
For now, the Market Timing Indicators for the Major Indexes are Neutral.
The Dean’s List and The Tide remain Positive. Just remember the Tide is based on NYSE breadth. Most of the action in this market is taking place on the NASDAQ.
The Sector Ratio remained at 23-1 Positive after yesterday’s session. The top five strong sectors were Retail, Transportation, Autos, Consumer Products, and Cap Goods. The only weak sector was Energy.
As discussed in yesterday’s comments, the Model used 70 percent of its cash to go long the QQQ’s at 290.44. The Model expected that the NASDAQ would rally along with the Dow after Thursday’s small change in the A-D oscillator suggested a Big Move was coming. However, when the Q’s did not follow the Dow, it suggested that something else was going on, something that could be extremely negative. So, the Model exited the trade at 290.71 for a small profit.
As I said when I started using the new Scalp Trading Indicators for the Model, it will NOT stay in the QQQs if the volume indicator turns negative. The indicators on GLD (gold) remain mixed, with positive volume. Mixed indicators on GLD are OK because the pattern suggests it is completing a Major Wave 4 down. As I have mentioned before, final wave ‘c’ down of Wave 4 down could fall to the 174-175 level before Wave 4 completes. That would be normal and acceptable because of where it is in the overall pattern. However, a negative volume indicator on the QQQ is NOT acceptable because it has a negative pattern that could lead to significantly lower prices.
If you have a chance this weekend, take a quick look at the ST Indicators on the Daily charts of the DIA, QQQ and GLD. This simple step, which should take less than a minute, should help clarify what’s going on with the markets.
Have a great weekend.
That’s what I’m doing.
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.
A Few More Weekend Thoughts
After looking at a few charts this morning, I’m starting to believe that the Friday’s down move was the start of a wave ‘c’ down within a larger corrective Wave 2 down. If this is the case, the NASDAQ could trade down to the 11,500-11,600 level before wave ‘c’ down completes. The equivalent level on the QQQ is near the 280 level. On Friday, the Q’s closed at 288.57. Then once this a-b-c correction completes, the NASDAQ should resume its rally as Wave 3 up unfolds. This rally has potential to the 12,500 level with even slightly higher prices once all five waves of the rally complete.
The main reason I’m leaning toward this Bullish Scenario is because the Sector Ratio remains soooooo positive. It’s just hard for me to get too negative when I continue to see 23 sectors moving up with only Energy moving down.
As of Friday, the Model is out of its position in the Q’s. If the Q’s begin to trade down tomorrow, the Model will simply watch from the sidelines and wait for the indicators to turn positive before entering a new position. Remember, the indicators on the Q’s are currently mixed and this usually occurs during some type of corrective wave. This is another reason why I believe the Q’s will see slightly lower prices in the days ahead.
BTW, if the above analysis is correct, the wave ‘c’ decline shouldn’t take too long. Wave ‘a’ down was pretty simple and took about 2 days, so wave ‘c’ down should be complex and take 3-4 days. In other words, with the possibility of a complex wave ‘c’ down ahead of us, even experienced traders should be cautious during the next few days to avoid getting whipsawed. It’s just a lot easier to trade impulse waves and the next one should be starting near the end of this week.
TWID,
h
Market Signals for
10-19-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | NEU | 15 Oct 2020 |
NASDAQ | NEU | 15 Oct 2020 |
GOLD | NEU | 14 Oct 2020 |
U.S. DOLLAR | NEG | 09 Oct 2020 |
BONDS | NEU | 02 Oct 2020 |
CRUDE OIL | NEU | 15 Oct 2020 |
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.
Category: Professor's Comments, Weekend Strategy Review