Weekend Strategy Review October 25, 2020

Posted by OMS  at October 25th, 2020

The markets were mixed on Friday. The Dow finished with a loss of 28 points, closing at 28,336. The large cap index was down 271 points for the week.  The tech heavy NASDAQ gained 42 points on Friday but was down 123 points for the week. The markets continue to trade in a narrow range with unclear patterns.

One of the things I try to do every week in my Weekend Strategy Review is to give students a technical picture of what’s happening in the market so they can develop a strategy to trade the market in the weeks ahead.  But unfortunately, this is not possible this weekend.  There are too many patterns on the Board now with too many variations that could cause the market to go either up or down.

As you know, during the past few weeks, I have been writing about two possible scenarios for the Dow: one Bearish (a Wave 2) and one Bullish (a Wave 5).  The Bearish scenario would have the Dow re-test the area near the 3 September high of 29,199 and then fall.  The Bullish scenario would exceed 29,199, then pull back slightly before rallying to 30,000+ into the election.

I also wrote about a similar situation on the NASDAQ which appeared to be completing a Wave 2, with a possible Wave 3 down to follow. This Bearish scenario remains in tact as of this weekend, and as long as the NDX remains below the 12 October high of 11,965, the odds suggest that prices will begin to drift lower into the 21 September low of 10,678 with even lower prices likely.  On the other hand, if you recall, I expected that Wave 2 up on the Dow and NDX would complete by Friday and start an impulsive move down, typical of wave 3 action.  As of Friday, this has not happened. 

Instead, the Dow opened by trading higher.  This was OK, as the move appeared to be the completion of wave ‘c’ up of Wave 2 up.  But IF it was wave ‘c’ up. It should have carried to the 28,600 level, the level I mentioned and expected.  But instead, after a few minutes the rally stopped and started to fall. It looked like Wave 3 down was starting. 

But just after lunch, the decline stopped at the 28,147 level and then rallied back to 28,337 into the close.  In other words, the intraday action was NOT impulsive and was more typical of an a-b-c retracement within a larger pattern.  This was a major problem for the Bearish case. It means that the major markets could be developing a much larger upward flat pattern that could cause the Dow to push higher toward the 12 October highs into the election.  If this is what’s happening, the Dow and SPX should begin to move higher on Monday.

It’s a little different with the NASDAQ as its wave structure remains the weakest of all the markets. That’s because the decline since the 2 September high of 12,439 was accomplished in five waves.  Then the rally into the 12 October high was an a-b-c affair.  So, it looks like waves 1 and 2 of the new Bear market are in for that index.  Any analysis of the techs MUST take this into account.   Further, the recent decline since the 12 October high of 12,205 was also accomplished in five waves.  When declines are being accomplished in five waves, it means that the primary trend is down.  So, IF a rally occurs in the NDX next week, the most likely place for it to stop would be near the 11,800 level, which is the level of the prior wave 4.  The NDX closed at 11,693 on Friday, so we’re talking about a rally of another 100 points or so.  On the other hand, If the index opens lower on Monday and breaks below 11,525, all bets are off for the Bullish case.  A move below 11,525 would project an immediate decline to the 11,300 level with the next target being the 21 September low of 10,678.

The most important take away from the above discussion is that with mixed indicators and patterns, almost anything can happen next week.

The Market Timing Indicators for the Major Indexes are mixed.  The timing indicator for the Dow is Negative while the same indicator for the NASDAQ is Neutral.

The DMIs for the DOW (DIA) and NASDAQ-100 (QQQ) are Negative.

The Dean’s List and The Tide are Neutral.

The Daily Scalp Trading Indicators on the Dow (DIA) and QQQ are mixed. The volume indicators are negative while the momentum is positive but heading down.  Again, when the Scalp Trading Indicators on the Daily Charts are mixed, students should expect volatile back and forth trading.  This is a period when you will get frustrated by the daily whip saws in the market.

The Sector Ratio strengthened to 20-4 Positive after yesterday’s session.   The top five strong sectors were Retail, Transportation, Autos, Consumer Products and Utilities. The four weakest sectors were Energy, Media, Foods and FoodDrugs.

There were NO Changes to the Model after yesterday’s session.  The Model remains mostly in cash with a small portion of its portfolio (about 20 percent) in gold. 

Have a great weekend.

That’s what I’m doing.

h

BTW, the Scalp Trading Indicators on Apple (AAPL) are still mixed.  The volume indicator remains negative with a momentum indicator that is still positive but close to turning negative.  As you know, because of how heavily AAPL is traded, the volume on AAPL is always something to watch.  It’s much better than that of the Q’s.  So, with the volume already Negative, IF the momentum turns negative next week, the stock should be headed for the low 90s.  Apple will also impact what happens to the NASDAQ.  So, watch the indicators on Apple next week!

Also, the indicators on the other FAANG stocks are in the same boat.  AMZN has mixed indicators, just like AAPL.  The indicators on Netflix (NFLX) are already Negative.  Facebook (FB) is still positive.  So, the FAANGs are showing mixed signals.  Another reason to expect whipsaws.

Please be extremely cautious IF you trade next week.  The patterns and the signals are mixed and NOT showing any clarity.  Staying on the sidelines early next week might be the best strategy.

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

10-26-2020

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.