Weekend Strategy Review September 13, 2020
Posted by OMS at September 13th, 2020
The markets were mixed on Friday. The Dow finished with a gain of 131 points, closing at 27,666. The large cap index was down 468 points for the week. The tech heavy NASDAQ lost 66 points on Friday and was down 460 points for the week.
On Friday, the Dow tested the 27,500 level for the fourth time since 8 September firming up the right shoulder of its Head & Shoulders Pattern. A break of the 27,500 level next week will likely send stocks reeling.
There was a small change in the A-D oscillator on Friday, so we need to be on the lookout for a Big Move within the next 1-2-days.
Breadth on the NYSE continues to weaken on rally days, like yesterday, and increase on declines. Friday’s A-D ratio was negative even though the Dow and SPX finished in positive territory. There were 148 more stocks closing to the downside vs. up. Same for the volume, as advancing volume continues to be weak on rally days and stronger on days when the market declines. In other words, in terms of breadth and volume, all the classic signs of tired market are now present.
However, until the Dow breaks below the 27,500 level, there is still a possibility (low) that the decline we’ve seen since 3 September could be interpreted as a Wave 4. If this is the case, the Dow could still rally above the 3 September high to complete Wave 5 up of the pattern. A close below the 27,000 level would eliminate this alternate scenario.
As I mentioned yesterday, my target for the primary scenario (the developing H&S Pattern) is the 25,800 level…if 27,500 is broken. Beyond that is the 25,000 level, which is the target of the Rising Wedge Pattern. If these targets are achieved, several larger patterns will come into play. These larger patterns suggest the March low of 18,214 will be tested.
I am currently on Full Red Alert.
The Market Timing Indicators for the Major Indexes are Negative. The DMIs for the Dow and NASDAQ are Negative.
The Dean’s List and Tide are Negative.
My algorithm remains active, highlighting another 45 stocks as shorts on Friday. So, for the past three days, the algorithm has highlighted 102, 56, and 45 shorts. This is eerily like what the algorithm did back in late February which led to a decline of over 10,000 Dow points.
The Sector Ratio remained steady at 18-6 Positive. If the market declines next week, the Sector Ratio should continue to weaken. If it turns negative, it will confirm that Major Wave 3 down is underway. The top five weak sectors were Energy, Semiconductors, Banks, Computers, Utilities and Real Estate.
The Model bought 800 shares of QID, the inverse ETF for the NASDAQ (QQQ) during Friday’ session at 9.81. The Model continues to hold trial positions of 1,200 shares of TWM, 1,600 shares of DXD, 400 shares of DUST, and $35,531 in cash. The Model continues to look for opportunities to buy shares of inverse index ETFs.
Gold (GLD) fell slightly on Friday but remains in its month long triangle pattern. Gold remains at a critical juncture as triangles are usually found in a wave 4. If this is the case, gold could be ready to explode higher. The alternative is that the triangle could also be the middle wave of an a-b-c move for gold with wave ‘c’ down next. Either scenario is possible. The next major directional move for gold should be become clear by next week.
I continue to watch the Dollar for clues as to how the triangle in gold will be resolved. Right now, the Dollar appears to have bottomed after declining to its 1 September low of 91.7. This week, prices continued to act like they want to move higher. If this positive action continues, it will put pressure on gold. A move above the 93.75 level on the Dollar would suggest gold and the Euro are ready to decline. BTW, a falling Euro would have negative implications for the European, Canadian, and American equity markets. Germany (EWG) is currently on a Neutral Signal with Canada (EWC) on a Sell Signal. Bottom line: Watch the Dollar.
The next election is now less than two months away. So, this weekend, I thought it might be a good time to investigate how the market performed in the two months prior to the election and then what it did after the election. The answer to the first question is …not so good. The answer to the second is …mixed.
Looking back, one thing is certain: The markets do not like uncertainty. In just about all the recent elections I looked at since 1992, the market fell in the two months preceding the election, no matter who was running for President.
In 1992, when George H. Bush ran against Bill Clinton, the Dow fell from 3,400 to 3,100 in the two months prior to the election. Yes, the Dow was really trading at 3,400 in the early 90’s.
In 1996, Bill Clinton’s second term, there was no September – October slump, as there was little uncertainty as to who would win. Clinton’s victory was followed by a significant post-election rally that saw the Dow move from under 6,000 to over 7,000 in the four months after the election.
In 2000, when George W. Bush ran against Al Gore, the Dow fell over 2,000 points from early September into October. There was no post-election rally.
In 2004, Bush’s bid for re-election, the Dow fell from 10,313 to 9,750 in the two months preceding the election. There was little uncertainty that he would win a second term. The election did produce a 1,000 point relief rally.
The 2008 election between Obama and McCain wasn’t much of a contest. The market was in the process of crashing, dropping over 3,000 Dow points in the two months prior to the election after falling from its early summer highs near 13,000. The country was ready for a change in leadership. However, it’s interesting to note that the change in leadership did not produce a post-election relief rally as the market continued to fall into March 2009.
Obama’s bid for re-election in 2012 was pretty much a forgone conclusion, but the Dow still pulled back about 1,100 points in the two months prior to the election. Once the election was over, the Dow rallied for almost 3,000 points in the eight months that followed.
In 2016, the Presidential election (Trump vs. Clinton) was filled with much uncertainty (and anxiety) in the 2 months before the election. The Dow basically flat-lined during this period, dropping about 800 points. But once the outcome of the election was known, the Dow made one of the largest relief rallies in history, moving from 17,888 to over 26,600 before it had its first correction (minor) four months later.
So, what can we conclude from this small pre-election study?
Well the first thing is obvious. The two months prior to a Presidential Election can produce extreme levels of uncertainty. And markets DO NOT like uncertainty, even mild uncertainty when the election of an incumbent is almost guaranteed (as in 1996 and 2012). Since its 2 September high of 29,163, the Dow has now fallen almost 1,500 points. It is now sitting near trend line support at the 27,500 level. If this support is broken, the indicators, patterns, and past pre-election history suggest significantly lower prices in the weeks ahead. What happens after the election is anybody’s guess, but history suggests mixed results.
Because of this, students should not worry about what happens AFTER the election. We need to focus on the present. With the market already down almost 1,500 Dow points, and history showing that the September-October period prior to a Presidential election can be extremely negative, I’m totally focused on that Head & Shoulders Pattern on the Dow with neckline support at the 27,500 level.
Have a great rest of your 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.
Market Signals for
09-14-2020
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | SM CHG |
DEANs LIST | NEG |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 04 Sep 2020 |
NASDAQ | NEG | 04 Sep 2020 |
GOLD | NEU | 26 Aug 2020 |
U.S. DOLLAR | NEU | 10 Sep 2020 |
BONDS | NEU | 09 Sep 2020 |
CRUDE OIL | NEG | 04 Sep 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