Weekend Strategy Review September 12, 2021
Posted by OMS at September 12th, 2021
After a strong open with one of the strongest Ticks of the year on the NYSE (+1344), the Dow started a strong decline to close 272 points lower at 34,607. The Dow was down 762 points for the week. The NASDAQ was down 133 on Friday and down 248 points for the week. The big move down was predicted by Thursday’s small change signal in the A-D Oscillator.
In Friday’s early comments, I discussed how the Dow could bounce after testing trend line support near the 34,800 level. So Friday’s opening bounce to 35,104 was no surprise. When I saw the opening rally, I initially thought it was wave ‘a’ of the retracement I was looking for, however once the wave ‘b’ decline dropped below Thursday’s low, I knew it was no longer a wave ‘b’. It had to be part of a larger decline that would test 34,600, a critical level I also mentioned in Friday’s comments. And that’s exactly what happened. The Dow closed six points from that critical support level. It was the lowest weekly close since mid-June.
So, what does this all mean? Well, for starters, it sets up the possibility of major down day on Monday. If the 34,600 does not hold on Monday, most technicians on Wall Street will not like the fact that the 18 August low of 34,690 has been broken. To them it means that the Dow is starting to make lower highs and lower lows, a sign that a major change in trend is taking place. If you pull up a chart of the Dow, you will see that the index made its all- time high on 13 August at 35,631. Three days later, on 16 August, it dropped to a potential Wave 1 low of 34,690. The ensuing rally, a potential Wave 2 retracement only reached a high of 35,510 on 30 August, so it was NOT a new high. After that high, the Dow started a five wave decline into yesterday’s low, which was lower than the 18 August low. In other words, the Dow is now making lower highs and lower lows. Good technicians cannot ignore this, especially after the Dow spent the past three months forming a classic five wave Ending Diagonal Pattern which almost always marks the end of a major Bull Market. So that’s where we are now.
Can we rally from here? Yes, but it MUST happen on Monday. If you recall, a few weeks ago, I discussed how a major divergence was taking place between the Dow Industrials and the Dow Transports. That divergence, which is always a sign that the economy is in trouble, continued into last week. Then as the Industrials attempted to make a new high, the trannies gave up the ghost of their Wave 2 retracement and started Wave 3 down. The pressure was too much for the Industrials to handle. It was classic case of the Dow Theory from the 1920s at work.
Anyhow, if the Dow does start a rally on Monday, and BTW, it’s a Big IF, it should be an a-b-c affair that could push back to the 35,300 level. I felt better about the odds for a retracement rally when the Dow was still above 34,700. But now that the index has treaded down to 34,600 and made a lower low, there’s a danger that instead of the decline being a Wave 1 down, Friday’s decline could be part of Major Wave 3 down. If this is the case, the odds for a retracement rally are slim to none. This is a time for EXTREME caution.
One reason I say this is because of the Ending Diagonal. The pattern started back on 18 June at the 33,271 level. Once prices break lower from an Ending Diagonal, the target is always where it the pattern began. So, if 34,600 is broken on Monday, prices should quickly fall to 34,150. After that, the next target is where the ED began or 32,271. There could be a small rally after that, but prices should continue to decline for months, if not years. There is a large triangle pattern on the board, sometimes known as a megaphone, which suggests prices could fall to the 18,000 level or lower in the years ahead. Remember, the March 2020 Covid panic low was 18,213. This low is part of that megaphone pattern, so if prices start to break down next week, the larger pattern suggests prices could exceed that low. I don’t know if this will happen, but it could.
To tell the truth, all I’m focused on now is what will happen on Monday. Here’s the deal: If the Dow rallies on Monday, I’ll start looking to short the Dow (and other indexes) from levels above 35,000. I’d like to say from 35,100 to the 35,300, but now that the Dow has made a lower low, I’m not sure if it will get back to those levels. It won’t if Wave 3 down is underway. On the other hand, IF the Dow gaps lower on Monday’s open, I’ll look for opportunities to establish a few more short positions using inverse index ETFs. BTW, the Scalp Trading Indicators on the short-term bars have been excellent tools for doing this. If you look a 10-minute chart of the Dow (DIA) you will see two clear entry points to establish short positions. One just after the open and one just after the 13:00 mark.
Once again, IF the Dow starts lower on Monday, I don’t want to own this market. I might not get the best entry points on a lower opening, but this is not the time to be picky. For me, a move below 36,000 would tell me the Dow is going a lot lower. So, I’ll be looking to purchase a ticket to ride. ‘Nuff said.
The Market Timing Indicators for the Dow and S&P have turned Negative. The same indicators on NASDAQ have turned Neutral (just barely…another down day will turn them negative).
The Scalp Trading Indicators for the Dow (DIA) remain Negative. The ST Indicators on the S&P (SPY) and NASDAQ (QQQ) have turned Neutral.
The Dean’s List has turned Neutral. The Tide is Negative.
Here’s the biggest change….The Sector Ratio fell to 9-16 Negative after yesterday’s session. The top five strong sectors were Telecoms (1), Semiconductors (1), Insurance (1), Computers (0), and Household Products (0). Students should note the low RS ratings that are now associated with the top sectors. The five weakest sectors are Energy (-3), Autos (-2), Retail (-2), Consumer Products (-2), and Transportation (-2).
Model Update: There were NO Changes to the Model. It is still 100 percent in cash.
Top Stocks: I think it’s best to forget the Top Stocks for now. However, I did find it interesting that even though the Dow got hammered on Friday dropping 272 points, CCJ, the Top Stock on Thursday’s MWL was up 0.41 cents. Pretty impressive!
All the stocks identified by my Trend Algorithm as potential shorts were down on Friday. These include IBM (-0.72), LMT (-3.05), BBBY (-0.89), PAYX (-1.02) and CSX (-0.40). Depending on what happens early Monday, I’ll post a few more shorts for you to look at. Otherwise, if the market opens higher, I might have to look a few longs to trade.
Gold: Gold (GLD) dropped 0.85 points yesterday to 167.18. The Timing Indicators remain Neutral. Friday’s action appeared to be part of an a-b-c retracement pattern for corrective wave 2. If this is the case, the next wave down should take gold (the metal) down to the 1,720 level or lower. If the indicators turn Negative, I’ll short a few shares of the gold miners. Gold closed at 1,788 on Friday.
Bonds: I don’t have anything new to say about Bonds after Friday’s action. I’m still waiting for the indicators to turn negative before buying TBT. Be patient and wait for a signal change
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.
Market Signals for
09-13-2021
DMI (DIA) | NEG |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 08 Sep 2021 |
NASDAQ | NEU | 09 Sep 2021 |
GOLD | NEU | 02 Sep 2021 |
U.S. DOLLAR | NEG | 23 Aug 2021 |
BONDS | POS | 09 Sep 2021 |
CRUDE OIL | NEU | 02 Sep 2021 |
CRYPTO | NEG | 10 Sep 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.
Category: Professor's Comments, Weekend Strategy Review