Weekend Strategy Review April 24, 2022

Posted by OMS  at April 24th, 2022

Stocks got hammered yesterday as Wave 3 down kicked off with a 90 percent down day.   The decline was the impulsive action I was looking for to confirm the wave count and Bearish patterns. Not even one of the 30 stocks in the Dow closed the day higher, as key support levels in several of the major indexes were broken.  This should lead to further downside in the weeks ahead. 

The Dow finished with a loss of 981 points, closing at 33, 811.  The NASDAQ and S&P were down 335 and 122 points, respectively.  IWM, the ETF I use to track the Russell 2K, fell another 5.12 points to close at 192.68 after losing 4.53 points the previous day.  The ETF broke below its key support level of 195.77 early in the day to tell us that Wave 3 down was underway.  If you’re not using IWM to track the Russell, which closed at 1991.46 yesterday, down 46.73 points, you should know that my next target for the index is near the 1550 level.  Basically, what I’m saying is that now that the key levels I previously mentioned for the RUT have been broken, there is NO SUPPORT for over 400 points in the small cap index. BTW, the Hockey Stick Pattern for Wave 1 down and Wave 2 up that has formed since the 8 November top also projects a decline to the 1550 level.  Pretty scary stuff! 

In the past few weeks, I have been warning about the major declines I see coming.  Thursday’s reversal pattern on the major indexes signaled the end of Wave 2 up and yesterday’s impulsive decline was the start of Wave 3 down.  So now we know what we are dealing with, and what lies ahead.  In the earlier paragraph, I mentioned my target for the RUT. Just so you have them, my initial target for the Dow is near or below the 32,000 level.  The reason I’m saying this is because Wave 1 down on the Dow completed on 24 February at the 32,272 level.  This means that Wave 3 down should drop below this level.  A downside tend line that connects the two previous lows of the pattern suggests a decline to 31,000 is possible.  But I’ll need to see what happens once the Dow approaches 32,272 before I’m willing to make that prediction.

The one thing students should remember is that the decline will NOT be straight down.  There will be significant rallies along the way.  Retracement rallies in a Bear Market can be violent!  Remember, a lot of traders are short now, and if the market gives any sign of strengthening, these traders will rush to cover their positions in a heartbeat.  The best way to counter any rally is by watching the bias on a daily basis. If the bias turns positive, either exit your short positions, or hedge them with a few long index ETFs.  This is the reason I have been teaching my students to use both TZA and TNA (long RUT) for trading the Russell 2K. Again, there will be several violent rallies as this Bear market unfolds in the months ahead. So, pay attention to the bias and make sure you’re trading with it and not against it.

BTW, I want to say something else. This Bear market will likely last for several years.  It’s not going away soon.  Remember, everything I said I the above paragraphs with respect to the wave count is only dealing with Wave 3 down.  After this wave completes, probably several months from now, there will be a Wave 4 rally and then a Wave 5 decline.  By the time all five waves on the Bear are complete, the Dow will likely be trading well below the 25,000 level.  I can even make a case for 20,000 or lower, but I don’t want to do this today.  For now, let’s just concentrate on the Wave 3 down trip to 32,000.

To do this I first want to switch to the S&P. That’s because after looking at yesterday’s rout on the Dow, I really don’t see any stopping point right now.  However, because yesterday’s decline on the S&P stopped right at the trend line from three key lows on that index, it’s possible that wave 1 of Wave 3 down on the S&P completed yesterday.  If this is the case, we could see a small rally early next week.  If this happens, I will once again be looking to short the market by buying inverse ETFs like TZA, SQQQ and SDOW (in that order).  I still believe the Russell and the NASDAQ are the weakest indexes and are the best bets for leading this market lower. BTW, my first target for Wave 3 down on the SPX is also below the 24 February low of 4,114.  It could be significantly lower.  On Friday, the SPX closed at 4,271.

BTW, the Head & Shoulders pattern on the Dow is no longer in play.  The zig-zag rally for wave ‘c’ up in Wave 2 up destroyed the pattern.  However, the Hockey Stick Pattern and the pattern based on the 24 February Wave 1 low are still very much in play, so don’t worry too much about the H&S.  H&S patterns, while dependable once the neckline is broken, only work about 70 percent of the time.  When they don’t break the neckline, they often morph into other patterns, which is what happened this time.  Anyhow, what we learned from the past two days of trading is that Wave 3 down is underway.

The Deans List and The Tide have turned negative.  Students should note how short the Dean’s List has become.  They should also note that the top ETFs on the List are now mostly inverse index ETFs.

The Market Timing Indicators for the Dow, NASDAQ, SPY, and Russell 2K have turned negative. 

The Scalp Trading Indicators for the Dow, S&P, NASDAQ, and Russell 2K are negative.

The Sector Ratio fell to 6-18 negative after Friday’s session. The top five strong sectors were Telecoms (6), Energy (3), Foods (3), Utilities (3), and Food Drug (3).  The top five weak sectors were Semiconductors (-6), Media (-6), Autos (-6), Financial (-4), and Technology (-4). 

Doctor’s Trade:  Friday’s rally in TZA was good for another 2.58 points.  Since the confirmed Green Arrow appeared on Thursday to put us back in, the trade is now up 4.51 points. Remember the small Hockey Stick Pattern that has been developing the past two weeks suggests a move to the 37.73 level.  I’m keepin’ the trade until I see a red bar.

Nothing to new report on gold, bonds or cryptos.  They’re dead money for now.  The action is clearly in the inverse index ETFs.

BTW I received an email from Lee K. yesterday.  Lee recently took advantage of my last Consulting Special.  Here’s what he said: “I traded FNGD on the 5’s yesterday. Even better than TZA. Thanks for the consulting session. I have had winning days 10 out of the last 12 & the loss days were small when the market wasn’t making any significant moves one way or the other.” 

I was so moved by Lee’s email that I decided to offer a Special Birthday Consulting Session for the next three weeks.  My B-day is on 14 May, so the half price offer will be good ‘til then. Just go the web site and sign up.  Dave will take it from there.  Don’t worry, he will adjust the rate to $125 …just sign up.  BTW, this Bear Market is going to get serious. So, if you want to talk about anything that you don’t understand or if you’re not comfortable with something…sign up.  

Not convinced?  Both Thursday and Friday were triple cigar days for me…in each of my two trading accounts.  Doesn’t include the IRAs.  And this Bear is only getting started.  If you don’t understand something, spend the 125 bucks and get comfortable.  I won’t quit the session until you feel comfortable. 

Have a great weekend.

That’s what I’m doing,

h

Also, please tell your friends about the new Arrows and bias indicators.  I really need your help with this.  If they send an email to Dave, he will give them a free trial subscription.

Market Signals for

04-25-2022

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.