Professor’s Comments February 1, 2022

Posted by OMS  at February 1st, 2022

The markets finished higher again yesterday, the last trading day of January.  However, despite the strong rally for the past two days, January was the worst month for the S&P and NASDAQ since the crash of 2020.  History shows that when the S&P is down in January, it is usually not a good sign going forward.  A down January is usually followed by at least one lower monthly close. Given what I said last weekend about the current pattern suggesting higher prices into mid-February, it appears that once the current Wave 2 retracement rally completes, I believe the odds for a big Wave 3 decline, taking prices well below the 24 January low of 33,150 are rapidly increasing.

Another reason for my increasing bearishness has to do with Friday’s Commitment of Traders report.  The data showed that large speculators, who are mostly hedge fund managers, were responsible for over 8 percent of the open interest. This is the highest reported number in 27 years. The specs are trend followers and are almost always on the wrong side of the market when it finally turns. Taking the opposite side of the bet are the Commercial Traders (CT), who are almost always right when it comes to market timing. These guys are now starting to dump stocks in a big way.  It usually pay$ to be aligned with the Commercials and not with the Specs. Anytime I see the CTs dumping stocks I pay attention.

OK, so where are we after yesterday’s action?  Well, the Dow reached a high of 35,148.  That’s a little over a 50 percent retracement of Wave 1 down.  A 62 percent retracement would see the Dow rise to the 35,460 level. That is my short-tern target for now, but I’m not totally committed to it. The reason I’m still a bit gun-shy is that for where we are in the retracement rally, I’m seeing way too much divergence in momentum.  It could be a tough push for the Dow to reach the 62 percent level, which is not out of the ordinary for retracement Wave 2s.  I still believe the better bet at this point is to wait for slightly higher prices in the next few days and then look for Red Arrows to start shorting.  With the Dow up 565 points on Friday and another 406 points yesterday, I wouldn’t be surprised to see some type of minor wave ‘b’ pullback during the next day or so before the market attempts its final wave ‘c’ push into mid-February.

BTW, the 35,500 level is where retracement sub-wave 4 of Wave 1 down ended.  It’s not unusual for retracement Wave 2s to use previous sub-wave 4s as targets.    Yesterday’s relatively strong A/D ratio of 4.77 on the NYSE does suggest there could be some near-term follow-through, but again, the 35,500 level represents strong resistance.  So, IF the Dow starts to approach this level, I’ll start looking for Red Arrows.  BTW, IF the Dow does manage to blast through resistance at the 35,500 level, the next major resistance level is the previous sub-wave 2 high of 36,513. So, we will need to watch 35,500 carefully.

I still believe the better bet is shorting the Russell 2K.  The RUT was down 21 percent since its 8 November top into the 27 January low. A 20 percent decline is usually considered a crash!  IWM, the tracking ETF for the RUT bounced along with the market the past two days and is approaching near-term resistance at the 203.55 level.  Again, this resistance, just like that on the Dow is from the previous sub-wave 4 high.  One of the reasons I consider the RUT to be a better bet than the other indexes is because the near-term resistance is a lot closer AND the RUT is already in Wave 3 down.  Yesterday, IWM closed at 201.24.  I’ll start looking for Red Arrows near the 203 level.  My intermediate-term downside target for IWM remains near the 183 level. 

My Doctor’s Trade on TZA remains on a Red Arrow since Friday.  I’m just waiting for the next Green Arrow.  

The Dean’s List stays negative. The Tide has turned neutral.

The Market Timing Indicators for the Dow, S&P, and NASDAQ are negative. The Scalp Trading Indicators for the Dow, NASDAQ, and S&P remain negative.

The Sector Ratio stayed at 4-20 negative after Monday’s session. The top four strong sectors were Energy (4), Foods (1), Food Drugs (1) and Utilities (0).  The top five weak sectors were Semiconductors (-5), Retail (-4), Cap Goods (-3), Autos (-2), and Consumer Products (-2).  Most of the remaining sectors are also very weak with RS rankings of -2s and -1s.  I found it interesting that even though the markets rallied hard during the past two days, the sectors rankings did not buy into the advance.  They remain weak.

The cryptos rose yesterday and are starting to show signs of a potential bottom.  It will be interesting to see if Bitcoin can hold current levels and break back above the 39,000 level. If it can’t, a re-test of 35,500 or even 33,000 is likely in the cards.  That’s why it’s important for Bitcoin to break above and hold the 39,000 level now. For students interested in trading Bitcoin, you might want to note that GBTC, the ETF I use to trade Bitcoin, has just generated a confirmed Green Arrow on its 4-hour chart.  Might be something to watch.

Gold’s pop during the past two days appears corrective.  I still believe gold is a better intermediate-term short than anything else.  The last two bars on the 4-hour chart of

GLD are Green while the ETF remains on a Red Arrow. I’ll look to buy GLL, an inverse ETF for gold, on the next Green Arrow.  This is something I will put in my IRA.

That’s what I’m doing,

h

Market Signals for

02-01-2022

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