Professor’s Comments December 30, 2021
Posted by OMS at December 30th, 2021
Stocks were mostly flat yesterday on light volume and breadth. The Dow finished with a gain of 90 points, closing at 36,488. The NASDAQ was down 16 points; the S&P rose 7. Volume on the NYSE was only 72 percent of its 10-day average. There were 157 new highs and 89 new lows.
Yesterday’s action suggests that stocks will likely top within the next few days, and then decline in January as Wave ‘D’ down unfolds within the Ending Diagonal Pattern for Wave 5 up. Yeah, I know it sounds complicated, but it really isn’t. The Ending Diagonal on the DOW, S&P, and NASDAQ will need to develop five waves before the pattern is complete, so be patient. This is one of the reasons I’m currently focused on the weaker Russell 2K, as it appears to be within days of completing wave ‘C’ of Wave 2 up. IF my analysis is correct, the RUT should start its Wave 3 decline at any time now.
Anyhow, before I get to the Russell, I want to talk a bit more about the Dow, mostly because it has two interesting possibilities before it completes. If the Dow is indeed tracing out the final waves of a five-wave Ending Diagonal for Wave 5, it could develop in two ways. The first would be a standard five-wave pattern that would end sometime in late February above the 38,300 level. The other possibility is for it to form a much rarer Expanding Diagonal. In this pattern, the Dow would only rally to somewhere between 36,566 and 37,300. Wave ‘D’ down in both patterns will likely see pullbacks down to the 35,200 to 35,500 levels, before they push higher in final Wave ‘E’ up. So, from a trading perspective, all the indexes should begin to decline in January, but in the case of the Dow, NASDAQ and S&P, once the decline completes, they should rally to new highs. I don’t see new highs coming in the RUT.
That’s why I’m focusing on IWM and TZA for now. I’m watching IWM, the ETF for the Russell 2K, and looking to trade TZA, the 3X inverse leveraged EFF for that index. It’s basically the same logic I use to trade the Dow or any other index. When I trade the Dow, I watch DIA and then trade either SDOW or UDOW as appropriate. I do this because the DIA has significantly more volume than either of the leveraged ETFs I use to trade it. And as most of you know, volume is EXTREMELY important in having correct indicators. The more volume, the better.
The other reason I’m watching the Russell and IWM is because it has a major support line that is a lot closer than the support lines on the other indexes. On IWM, major support comes in near the 212 level. This level is where the neckline’ of a major Head & Shoulders pattern has developed. So, IF 212 is broken, it should send small-cap stocks reeling. The decline should be about 31 points or down to the 183 level. If this happens, the RUT should fall about 300 points or down to the 1,865 level. There are no guarantees with H&S patterns as they fail about 25-30 percent of the time. But looking at it the other way, they are right about 70 -75 percent of the time. I like those odds!
I like the odds even better with my new arrows. If you look closely on a 30 min chart of IWM, you will see that the Bollinger Bands have tightened considerably. IF a confirmed Red Arrow appears today. I’ll buy a few shares on TZA based on the 30s. That should be enough to hold me for the next few days until I see what’s happening with the other indexes. I’m not going to go all-in until I see IWM begin to break below 212. In other words, IWM and TZA could waddle around for the next few days, even with a Red Arrow, if the other indexes don’t start to decline in their Wave ‘D’ down. I don’t like stocks to waddle, so only owning a few shares is fine for me. If you want to increase the size of your ‘trial’ position, you might want to step into it by buying a few more shares when the hourly bars generate a confirmed Red Arrow. You can also do the same thing using the 2-hour bars. But make sure you don’t have a full position until you see a substantial break of 212 on IWM. That’s the key. In other words, I will continue to look at TZA as a trade until IWM is well below 212. If TZA generates a confirmed Red Arrow on the 4-hour bars, I’ll hold my shares. This will be my strategy for the next few days.
The Dean’s List and The Tide are positive. The Market Timing Indicators for the Dow, NASDAQ, and S&P are positive.
The Scalp Trading Indicators for the Dow, NASDAQ and S&P are also positive.
The Sector Ratio stayed at 15-9 positive after Wednesday’s session. The top five strong sectors were Semiconductors (4), Technology (4), Household Products (4), Healthcare (3), and PharmaBio (3). The top five weak sectors were Energy (-3), Banks (-1), Media (-1), Insurance (-1), and Financials (-1).
I still don’t see much happening with gold, Bonds, or the cryptos. Bonds could be starting their Wave 5 decline because a Green Arrow has appeared on the 4-hour bars of TBT. I would have liked it better if the Green Arrow appeared after Bonds (TMF) made one smaller rally, but for now, I have to go with the confirmed Green Arrow.
An unconfirmed Red Arrow has appeared on the 4-hour chart of GLD. If the Arrow is confirmed, I’ll look to short gold using an inverse ETF. As previously discussed, if gold begins to break down, it could re-test the 9 August low of 1,693. I’d still be a little cautious with sizing my position as the overall pattern is not clear.
That’s what I’m doing,
h
Friday is New Year’s Eve. The markets will be open but will close early. My next posting will be on Tuesday, unless something unexpected happens. Follow the Arrows….
I wish you a safe, healthy, and prosperous New Year!!!
Market Signals for
12-30-2021
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 28 Dec 2021 |
NASDAQ | POS | 23 Dec 2021 |
GOLD | NEU | 23 Dec 2021 |
U.S. DOLLAR | NEG | 23 Dec 2021 |
BONDS | NEG | 23 Dec 2021 |
CRUDE OIL | POS | 23 Dec 2021 |
CRYPTO | NEU | 23 Dec 2021 |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
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