Weekend Strategy Review February 27, 2022
Posted by OMS at February 27th, 2022
The market staged a sharp snapback rally yesterday, relieving the EXTREME oversold conditions from Thursday’s low. The rally on the Dow filled the gap at the 8 February close (34,079), finishing at 34,095. In yesterday’s early morning Comments, I mentioned that the Dow would likely stage an a-b-c rally to the 33,600+ level to complete retracement wave 2 up. The rally was a little stronger than I expected, but still appears to be a wave 2. At 34,095, the rally satisfies all the requirements for a retracement wave 2 and should be complete, or nearly so.
The only real issue I had with yesterday’s rally was that it was so swift. In my Comments, I discussed how wave 2 up would likely unfold as an a-b-c affair. It clearly was not. But when I look at the extended hours trading, the rally that started late Thursday afternoon was followed by a 200+ point decline after the market closed, so maybe that was the ‘b’ wave and yesterday’s rally was wave ‘c’. It’s possible, and we’ll just have to see what happens when the marker opens on Monday. The other possibility is that yesterday’s rally was wave ‘a’ up, with waves ‘b’ down and ‘c’ up to follow next week. If this is the case, wave ‘c’ up could reach the 34,450 level. But the Dow would probably have to pull back several hundred points before that could happen. The short-term bias indicator showed that yesterday’s rally was pretty much out of gas by the close.
Anyhow, the thing to keep in mind is that whatever happens early next week, wave 3 of Wave 3 down should be right around the corner. Despite Friday’s 835 point gain, the Dow still finished down 21 points for the week. The bias still remains negative and I MUST respect that..
From a historical perspective, Friday’s big move after being down 4-5 percent earlier in the week, usually leads to further selling over the next week. I don’t have a lot of data on this, but the few times where the down /up sequence occurred in the past has led to several large downside moves the following week. This tends to fit with the wave 3 of Wave 3 down scenario. We’ll see.
Friday’s COT report also showed that the Large Speculators were still net long and were still buying the dips. The Specs are trend followers, and even though the Dow is down 2,900 points from its 5 January high, they still haven’t thrown in the towel. Like the mutulal fund managers, these guys are almost always on the wrong side of the market after it tops. The reason I watch the large Specs is because once they do capitulate, that’s when wave 3 of Wave 3 down usually starts. Given that the Specs were at a new net long extreme on Friday, it will be easy for this to happen during the next few weeks. In previous Comments I mentioned how the necklines of major Head & Shoulders Patterns were forming on at least three indexes. This ties in with what I see happening with the large Specs. So, IF the Dow starts to break below its neckline at 33,750 (4,250 on the S&P) you will start to see the Specs panic and head for the exit. That’s when the real pain will start.
Please take all necessary precautions to protect yourself now that we have Red Arrows on the intermediate-term bars of the indexes.
After Friday’s action, the Dean’s List is negative. The Tide has turned neutral. changed.
The Market Timing Indicators for the Dow, S&P are NASDAQ remain negative. The Scalp Trading Indicators for the Dow, S&P, and NASDAQ are also negative.
The Sector Ratio strengthened to 12-12 neutral after Friday’s session. The top five strong sectors were Energy (6), Material (4), Banks (3), Healthcare (3) and FoodDrugs (2). The top five weak sectors were Household Products (-3), Telecoms (-2), PharmaBio (-2), Computers (-2), and Semiconductors (-1).
Doctor’s Trade: TZA generated a red bar/Red Arrow on its final 4-hour bar on Thursday, which was my signal to exit the trade. The trade was good for a gain of 5.5 points or 17 percent. I will look to re-enter the trade on the next Green Arrow as my target for IWM, the ETF I use to track the Russell 2K, remains at or below the 183 level. IWM closed at 202.5 on Friday.
Options: I bought a few 17 June S&P500 Puts with a 350 strike price. Average price was about 4.80. I plan to buy a few more next week and will pay up to about 6.25.
Bonds: It’s possible that the long bond completed its wave 5 down on Friday. It’s also possible that the recent decline could be a wave 3. Doesn’t really matter. In either case, prices should start to rally from current levels, causing interest rates to fall. All I’m doing now is watching for a Green Arrow to appear on the 4-hour bars on TMF.
Gold: Yesterday’s spike in gold and subsequent pullback helped clarify the pattern I have been watching for the past week or so. It now appears that the 24 February high of 1,974 in the metal was the completion of Wave 2 up. If gold does not exceed 1,920 in the days ahead, the chart suggests further decline as Wave 3 down unfolds. Same for silver. GLL, an inverse ETF for gold, generated a Green Arrow on Friday. I plan to buy a few ‘trial’ shares this week and then add to the position when the bias turns positive.
Cryptos: The longer term chart for GBTC remains negative. I’m avoiding the cryptos for now. There are simply much better trading opportunities elsewhere, especially with inverse index ETFs.
Next week could be EXTREMELY volatile. Make sure that you are always on the right side of the new bias indicator.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for
02-28-2022
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 11 Feb 2022 |
NASDAQ | NEG | 11 Feb 2022 |
GOLD | NEU | 25 Feb 2022 |
U.S. DOLLAR | POS | 18 Feb 2022 |
BONDS | NEU | 25 Feb 2022 |
CRUDE OIL | NEU | 25 Feb 2022 |
CRYPTO | NEG | 16 Feb 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.
Category: Professor's Comments, Weekend Strategy Review