Weekend Strategy Review February 26, 2023
Posted by OMS at February 26th, 2023
Stocks fell hard again on Friday, testing critical support before bouncing into the close. The Dow, which was down over 500 points intraday, finished with a loss of 337 points, closing at 32,816. The NASDAQ and S&P lost 195 and 42 points, respectively. Volume on the NYSE was moderate, coming in at 99 percent of its 10-day average. There were 44 new highs and 47 new lows.
In Thursday’s Comments, I discussed how the S&P (SPX) would likely test the 3,940 level once it broke below support at 3,978 provided by its 50-day moving average and a rising trend-line from the October lows. This is exactly what happened on Friday, as the SPX traded down to 3,943 before bouncing to close at 3,970. The 200-day moving average, which is now the critical support level for the index, is currently at 3,940.12. A break of this level should start a waterfall decline that takes prices down to or near the 13 October low of 3,491.
From a pattern perspective, it appears that Wave 2 up on the S&P completed on 2 February. If this is the case, all the sub-waves since the 2 February high are part of wave 1 down of Wave 3 down. This past week, the action on the Dow looked impulsive, with the index dropping 697 points on Tuesday, 84 points on Wednesday, and 337 points on Friday. So, sub-wave 3 down of wave 1 down could be underway. The Dow is now below its 50-day moving average at 33,606 and appears on its way to test critical 200-day moving average support at 33,342. If this level is broken, the Dow should also start a waterfall decline down to the 28,000-29,000 level or lower.
From a breadth perspective, yesterday’s action on the NYSE saw 2.47 stocks close lower for every stock closing up. Downside volume also dwarfed upside volume coming in at over 71 percent negative. In other words, Friday was a very negative day, even though the Dow only lost 337 points. The thing that concerned me about Friday’s action was the TRIN on the NYSE which closed at 0.84. A number like this tells me that most traders are still not at all concerned about the patterns, wave counts, or proximity to critical support levels, least of all a potential market crash. This raises a Red Flag with me, as most crashes usually occur when traders least expect them.
Anyhow, the things to watch next week are the two critical support levels mentioned above. These are 3,940 on the S&P and 33,340 for the Dow. A break of these levels will likely send stocks reeling.
The alternative to the ‘crash scenario’ is still a Double Zig-Zag. In other words, as long as the S&P and Dow stay above their critical support levels, the Zig-Zag or a-b-c pattern that has formed from the October lows for retracement Wave 2 up could turn into a Double Zig-Zag. This means that the decline from the 2 February high is wave ‘b’ of the pattern. It also means that the indexes could have another rally left in them (wave ‘c’ up) that will take the indexes above the 2 February high. At this point, I give this alternate scenario low odds. However, it could happen. A break of the support levels mentioned above will increase the odds that wave 1 of Wave 3 down is underway. A break of the 22 December low of 3,764 on the S&P will completely eliminate the alternate scenario.
The Dean’s List remains neutral. The Tide is negative.
The Market Timing Indicators for the Dow and the NASDAQ are now negative.
The Sector Ratio stayed at 8-16 negative after Friday’s session. The top five strong sectors were Media (3), Banks (2), Financial (1), Insurance (1), and Healthcare (1). The top five weak sectors were PharmaBio (-3), Computers (-1), Retail (-1), Transportation (-1), and Food Drugs (-1). Students should note that the Sector Ratio is now negative.
My Trades: With stocks falling overnight, I was watching for a bounce so I could establish a few positions in inverse ETFs. That opportunity final came at the 12:02 mark when a Green Arrow appeared on TZA. I entered the trade when the volume confirmed the Green Arrow. I exited on the Red Arrow that appeared an hour later. I made similar trades using SDOW and SQQQ. Nothing special about them….just check the Bias to determine the direction of the trade, watch for a Green Arrow to appear, exit on a Red Arrow, and get paid.
Bottom Line: The markets are now at or near critical support levels. The patterns and wave counts suggest that wave 1 of Wave 3 down is starting. If during the next few days, support at the 3,940 level on the S&P is broken, I will be looking to buy inverse ETFs, like SDOW, TZA, SQQQ and SPXU. Follow the Arrows and trade in the direction of the Bias.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for
02-27-2023
DMI (DIA) | NEG |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 21 Feb 2023 |
NASDAQ | NEG | 24 Feb 2023 |
GOLD | NEG | 14 Feb 2023 |
U.S. DOLLAR | POS | 15 Feb 2023 |
BONDS | NEG | 09 Feb 2023 |
CRUDE OIL | NEG | 15 Feb 2023 |
CRYPTO | NEG | 24 Feb 2023 |
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.
Category: Professor's Comments, Weekend Strategy Review