Weekly Market Commentary

publication date: Aug 24, 2019
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NOTE;  All posts are opinions only.  No investment advice is given.  Consult with a financial adviser and do your own due diligence before trading.
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Market Summary for Week Ending August 16, 2020

 

The stock market remains at a critical point, as we enter the traditionally weakest time of the year (August and September).  Read on...

 

Chart signals continue to outperform the traditional "buy and hold" approach last week, although market volatility (in both directions) has been subdued thanks to the summer doldrums.  Assuming one had traded 1x leveraged $SPY shares at each of my entry/exit points, these would be the compounded year-to-date results:

 

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January 1, 2020 - August 14, 2020*

Proprietary Trading System ("Shadow Index"):  +78.8%
Standard Buy & Hold S&P 500 Strategy:            +  4.4%


* Prices assume that you traded an equal % of your portfolio in $SPY shares (with no options leverage) at each of my entry/exit points.  Past performance doesn't guarantee future success.
Trading 3x ETFs could have tripled this performance, and proper selection of strike prices and expiration dates could have made options trading results even more lucrative.  Source:  https://www.tradingideas.info/articles/portfolio

 

So, how do the longer-term charts look now?  The major indices have had a tremendous rally from March lows, and when I started looking at the dally charts, I expected to find 5 waves up from March 23rd.  However, the waves just don't seem to fit.  Instead, I found something unexpected.  When I compared $SPX to Gold (which theoretically removes both dollar devaluation and hedging bets from the price), the daily chart looks more like a 1-2 Up since March 23rd, with a correction back near the 62% Fib level and Wave 3 possibly having started just a few days ago.  Granted, this is a non-traditional view of the markets and I certainly won't base any trades on this subjective model.  However, it definitely points out that there are other possibilities and we shouldn't take an imminent sell-off for granted:

 

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An alternate and somewhat more likely wave count is found on the daily Dow Jones World Industrials Index, which would allow for a small Wave (2) pullback over the next few weeks (in agreement with bearish August/September seasonality) while also in the context of an overriding bull market that will generally continue through and after the election.

 

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A third possibility is that we are at or near the completion of 5 waves up since March lows.  This count would be followed by an ABC down to at least the 38% Fib level, which happens to line up with previous price pivots in late April, early May and mid-June.  In this scenario, the sharp drop in February and March was probably a Wave 2 of larger degree (as sharp zigzags are rarely Wave 4s), and that would suggest the impulse up from March 23rd constitutes only subwave 1 of a much larger bullish impulse that could conceivably run for another 1-2 years.

 

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In conclusion, there are multiple possibilities here and there's no certain if the market is going higher or lower short-term.  Although the longer-term picture looks bullish (due to non-stop Federal Reserve printing and U.S. Dollar devluation), we must remain unbiased about short-term trends and be willing to trade whatever the market gives us.  That's how I will be trading this week.  Remember, we've had an outstanding run with successful chart signals lately, but sometimes they do fail.  Always do your own due diligence before trading (or holding a position), only trade with "risk capital," and if you do trade options, consider trading in-the-money strike prices to minimize your exposure to time decay.

Have a great trading week!


 
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