Weekend Strategy Review September 27, 2020
Posted by OMS at September 27th, 2020
In Friday’s early Comments, I mentioned that a cluster buy program came in during the last half-hour of trading on Thursday. I also mentioned that buy programs like this usually have a positive impact on the markets, and in this case because of the pattern, it would likely lead to a Wave 4 rally between 400-600 Dow points. During yesterday’s trading, the Dow reached a high of 27,239 which was 424 points above Thursday’s close.
The Dow finished with a gain of 359 points at 27,173. It was down 483 points for the week. The NASDAQ finished with a gain of 241 points and as up 120 points on the week.
Yesterday rally was likely a corrective wave 2 or a 4 up within Wave 3 down of Major Wave 1 down. If it’s a wave 2, it might have another 100 points or so of rally left before it completes, and the next impulse wave down begins. I would use any rally on Monday to add to my short positions. Friday’s rally did nothing to change the overall negative patterns in place (Inverse H&S and Bearish Ending Diagonal). These patterns continue to suggest the Dow and the other major indexes should be trading significantly lower in the weeks ahead. The H&S Pattern has a downside target near the 25,700-25,750 level. The Bearish ED has a target just below 25,000. The previous Wave 4 down low in the Dow’s retracement rally that started on 23 March was 24,971, which makes it a likely target.
The alternate to this Bearish outlook is that the current decline could still be a Major Wave 4 a-b-c decline. Like I said previously, I don’t give this scenario much of a chance given the impulsive nature of the decline we’ve seen recently and the Bearish indicators. A break below 26,600 would eliminate this Bullish possibility.
I remain on Full Red Alert now that ‘neckline’ support in the indexes has been broken.
The Market Timing Indicators for the Major Indexes remain Negative.
The Dean’s List and Tide remain Negative. Students should note the short length of the current Dean’s List. It’s really short now.
The Sector Ratio weakened during yesterday’s rally. It is now 19-5 Negative. This is further evidence that a significant decline is developing once the current rally completes. The five strong sectors were Service, Retail, Consumer Products, Transportation, and Household Products. So, toothpaste and toilet paper are back on the strong list. Remember what happened last February when investors started buying service and household products stocks? Hmmm? That was just before the Dow tanked. The top five weak sectors were Energy, Autos, Banks, Healthcare, and Financials. I would expect these sectors will lead the market down.
The Model sold its 400 shares of DUST yesterday at 20.30. Going into yesterday’s session, gold was EXTREMELY oversold, and the pattern suggested that Wave 4 down in gold could be complete and that a Wave 5 rally would be next. When gold (the metal) hit my downside target near 1,860, there was no reason to continue to hold the inverse ETF. The Model continues to hold trial positions of 1,200 shares of TWM, 1,600 shares of DXD, 400 shares of DUST, 800 shares of QID, and $43,651 in cash. The Model will likely use some of the funds received from the sale of DUST to add to its shares of inverse index ETFs. On the other hand, IF the timing indicators on gold turn positive, and it appears that gold is indeed starting a lengthy Wave 5 up, the Model will consider buying a positive ETF for gold. Right now, with gold still in a negative pattern, with negative indicators, its too early to take a position in gold. The top of Wave 1 in the previous rally sequence for gold is at the 1,766 level. So, if gold continues to fall, it could have another 100 points of decline before it reaches that Wave 1 support. That’s way too much risk for me to be buying gold now, especially with a leveraged ETF. That’s why the Model will be focusing on inverse index ETFs for now. The patterns are a lot clearer.
BTW, after looking at how the market performed in the two months prior to a presidential election (negative), I read an article published by Bob Prechter and others in 2012. Bob talked about how the performance of the stock market could be used to predict the results of Presidential Elections. I thought the results were extremely interesting, so I thought I would share them with you today.
Bob and his fellow authors only looked at elections where the incumbent was running for re-election. They found that a lot of things like inflation, unemployment, and GDP don’t matter. I found this interesting because the last quarter of GDP that we have data for was down about 34 percent. None of the GDP data that Bob’s team analyzed got anywhere close to this negative number, so we’ll have to see if this outlying large number will impact his conclusions.
Anyhow, what Bob found was that when the market was up over 10 percent in the three years the incumbent was President, he was re-elected. If it was down 10 percent, he lost. It was that simple. Further, if the market was up over 20 percent in the incumbent’s 3 prior years, he won in a land slide, with a landslide being defined as victory with more than 40 percent of the Electoral vote. The results had an 87 percent success rate.
Maybe this is the reason President Trump spends so much time talking about the performance of the stock market. History suggests that it’s the performance of the stock market and NOT presidential polls, that is the only thing that matters.
All this starts to get interesting as we approach the next Presidential election. That’s because when President Trump was first elected in November 2016, the Dow was trading at 17,883. So, a 10 percent increase over 3 years would be 19,671. This is the level that Prechter suggests would lead to the President’s re-election. A 20 percent gain, enough to ensure a landslide victory, again according to Bob, would occur if the Dow stays above 21,459.
So, given the current patterns on the Dow and other indexes, which suggest a significant decline is coming in the months ahead, it will be interesting to watch these historical numbers as we move into November.
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
09-28-2020
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 18 Sep 2020 |
NASDAQ | NEG | 16 Sep 2020 |
GOLD | NEG | 21 Sep 2020 |
U.S. DOLLAR | POS | 21 Sep 2020 |
BONDS | NEU | 09 Sep 2020 |
CRUDE OIL | NEG | 23 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