Weekend Strategy Review December 18, 2022

Posted by OMS  at December 18th, 2022

Stocks had another bad day yesterday, dropping 282 points to close at 32,920.  Since the large cap index topped on 13 December, only 4 days ago, the Dow is now down 2,058 points. The NASDAQ and S&P were down 10 and 43 points on Friday.  Wave 3 down is now underway.

One item that caught my attention this week is the DSI Indicator or complacency vs. fear index published by trade-futures.com. At the 16 August Wave 2 high on the S&P, the index had a reading of 15, which was its lowest reading of the year.  Yesterday. the index was just under 14.  So even though the Dow lost over 2,000 Dow points this week, the indicator is telling me that there is no fear in this market.  This is EXTREMELY dangerous for where we are in the current market cycle. I mention this indicator today because so far this year, the DSI Indicator has called all four of the important tops since January.  The important thing it’s telling me now is that with a reading of just under 14, there is still plenty of room for the indicator to rise. For example, during the February- March crash, the indicator approached the 95 level.  I would expect to see similar levels before Wave 3 down is complete.

From a wave count perspective, since the 13 December top, the Dow has declined in 5 waves to yesterday’s low of 32,654.  Th waves are clearly visible on a 15 min chart.  The decline in the S&P has the same pattern. So, yesterday’s intraday low may have been the completion of wave 1 of Wave 3 down.  The alternate is that wave 1 down could extend, and the Dow could reach the 32,300 level (or lower) before wave 1 down completes.  As I mentioned in previous updates, the odds for any sort of significant rally at this point are slim now that my key support levels have been broken.  So, if the Dow does rally when trading resumes on Monday, I would view it as another opportunity to get short.  As a matter of fact, I would view all rallies now as shorting opportunities.

As I mentioned in Friday’s comments, Wave 3 down should eventually test and then fall below the 17 June low of 29,653.  However, the decline won’t be straight down, so we need to look at a few intermediate targets along the way.  The first target on the Dow results from a Head & Shoulders pattern that started from the mid-November lows.  This pattern projects a target near the 32,296 – 32,330 level.  It’s also possible that the Dow could fall to the early November low of 31,727 during this decline.   So, for now, I’m going to use the range between 31,700 and 32,330 as my target.  Another key target for the Dow is the 30 September low of 28,715.  At some point during the decline, this level should also be tested and broken during Wave 3 down.  For the Dow, the 28,715 level is Wave ‘B’ down of Wave 2 up, and as such, the Elliott Wave Principle says that it MUST be broken at some point during the Wave 3 decline. This level is more than 4, 200 points from Friday’s close!

I’m looking at similar declines on both the NASDAQ-100 and Russell 2K. On the NDX, Wave 3 of Major Wave 3 down has started.  This should be the strongest decline of the Bear Market.  The Wave 1 low on the NDX occurred on 16 June at 11,037.  So, Friday’s close of 11,249 is close to testing this key support.  Once 11,037 is broken, the next target is the 13 October low of 10,440 which is the Wave 1 of Major 3 down low. This level should easily be tested and broken in the weeks ahead.  After that, the next key level of support is the March 2020 low of 6,772. 

The thing to watch on the NDXS in the days ahead is the Hockey Stick and Blade pattern that formed since the 16 August top.  The ‘Stick’ is about 3,280 points.  If I subtract this from the 13 December high of 12,166, I get a target of 8,886.  So, 8,886 will be my interim target for the NDX on the way down to 6,772.

For the RUT:  The RUT has been the weakest of the indexes during the Bear Market.  It topped earlier than the Dow and S&P and has failed to confirm the recent Wave 2 highs in the Dow, S&P and NASDAQ.  My next target for the RUT is the 13 October Wave 1 of 3 down low of 1,641.  Once this level is broken, prices should begin to accelerate, leading the overall market significantly lower. This is one of the reasons I believe students should continue to focus on the Doctor’s Trade.

The Market Timing Indicators are currently positive for the Dow and NASDAQ.

The Dean’s List and The Tide are negative.

The Sector Ration stayed at 20-4 positive after Friday’s session.  The top five strong sectors were Cap Goods (6), Household Products (4), Semiconductors (4), Real Estate (3), and Leisure (3). The top four weak sectors were Banks (-2), Energy (-1), Retail (-1), and Food Drug (0).

My Trades:  I’ve been trading and holding positions in TZA, SQQQ and SDOW.  I sold a good portion of my Put options in DIA and SPY on Friday and will look to re-establish these positions on any bounce early next week.  I sold the Puts when I saw the Bias indicator on DIA 5 min bars showing positive divergence and finally crossing above the zero level at the 14:55 mark.  With the weekend approaching, and having a nice profit, I decided to take a few bucks off the table.  I never like to hold Puts when the Bias indicator is moving against me.

I made a lot of money this week by just looking at the Bias on the 4- or 5-min bars and then trading TZA, SQQQ and SDOW whenever a Green Arrow appeared.  The Bias is the KEY!  And right now, the Bias on TZA’s Daily Chart has just turned positive. (Check it out). The positive Bias now provides ‘high cover’ for all my inverse trades on the shorter-term bars.  The Daily Bias on SQQQ is still a bit short of the zero line.  The Daily Bias on DIA and SPY are even more away from the zero line, but they are rising. Once all the Daily Bias indicators on the indexes are below their zero lines, we’ll be well into the crash.

Protect yourself!

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

12-19-2022

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.