Professor’s Comments October 20, 2022

Posted by OMS  at October 20th, 2022

Stocks closed lower yesterday on weak volume and breadth.  The Dow finished with a loss of 100 points, closing at 30,423.  The NASDAQ and S&P were down 92 and 25 points, respectively. Volume on the NYSE was only 9.1 billion shares making it the lowest volume day in the retracement since 13 October.  The low volume has implications for the overall pattern which I’ll address in the next paragraph. There were 33 new highs and 310 new lows.

Since last Thursday’s low of 28,660, the Dow has chopped higher into Tuesday’s high of 30,838.  The choppy trading was a clear a-b-c move and was likely sub-wave ‘A’ of a larger A-B-C pattern.  The reason I say this is because of yesterday’s low volume. Yesterday’s pullback should have been larger if the wave 2 retracement was complete.  But it wasn’t. So taken together with the Buy Programs that were initiated last week by the President’s PPT, it’s now likely that the market will be supported into the election.  In other words, I believe the markets will likely continue to develop the ‘right shoulders’ of the larger H&S Patterns that are forming, and the ‘neckline’ support levels I talked about last weekend will not be broken until after the elections.  No guarantees.

With the lack of a large move down yesterday, which should have been the start of Wave 3 down, it’s starting to look like wave ’B’ of Wave 2 up will form a triangle. When triangles form in a wave 2, they can only be the middle wave or as a ‘B’ wave.  If this is happening, it means that we could some choppy trading for the next week or so before all five waves of the triangle are complete.  Then once wave ‘B’ is complete, wave ‘C’ up should take the Dow toward the 31,200-31,300 target level I mentioned last week.  In this scenario, wave ‘C’ up of Wave 2 up would complete just before the 8 November elections.  The set of crash waves I see coming for Wave 3 down would likely start after that. 

What this means for traders is that for the next week or so, the markets will likely remain in the triangle, so expect some very choppy range-bound trading. The once the triangle completes, the markets could stage a sharp rally into the elections.

For the very short term, there are two things that I noticed which suggest lower prices.  The first is the steady VIX.  It has been pulling back as the market rallied but closed above the 30 level for the past 9 trading days. The VIX is like a coiled spring and when it compresses like it has, it’s usually a short-term negative for the market. The second thing I noticed was the outperformance of the larger tech stocks compared to their smaller sisters.  When the NASDAQ-100 gets ahead of the other stocks in the NASDAQ, it’s also a short-term negative.  So, if a triangle is forming for wave ‘B’ down, we could see the market continue its pullback today with small rallies and pullbacks after that until the triangle completes.  We’ll see.

The Dean’s List is neutral, but The Tide has turned positive.

The Market Timing Indicators for the Dow has turned neutral.  The same timing indicators for the NASDAQ remain negative.

The Sector Ratio weakened to 2-23 negative after Wednesday’s session. The top two strong sectors were Energy (4) and Cap Goods (0).  The top five weak sectors were Semiconductors (-9), Telecoms (-6), Consumer Products (-6), Household Products (-5) and Retail (-5).

Bottom Line:  Continue to watch how retracement wave 2 up unfolds. Just remember, wave 2s are EXTREMELY difficult to trade.  If you trade them, use the short-term bars and exit your positions by the end of the day.  I still won’t hold inverse index ETFs overnight until I see the Dow below 29,614.

BTW, yesterday was another cigar day for me.  All I did was check the Bias at yesterday’s open on the 4-min bars and after seeing that it was positive on TZA and SDOW, they were all I traded for the rest of the day.  Easy!  If you get a chance, you might want to look a t the three Green Arrow trades I made.  The middle one that started at the 10:38 mark on TZA was the Big Winner.  Did you catch it too?  Hope you did!

That’s what I’m doing,

h

Market Signals for

10-20-2022

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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