Weekend Strategy Review June 20, 2022

Posted by OMS  at June 20th, 2022

The indexes were mixed on Friday on very heavy volume. The Dow closed down 39 points at 29,888. The NASDAQ and S&P finished up 152 and 8 points, respectively.  It was a relatively quiet day to an extremely volatile week that saw the indexes lose between 4.79 percent (Dow & NASDAQ) to 5.79 percent for the S&P.   

For the very short term, the indexes are EXTREMELY oversold and should stage some type of rally early next week. At this point, it’s hard to tell what form the rally will take, but there at least two alternatives.  The first is that wave 1 down and wave 2 up have completed and the next major move will be a series of powerful wave 3s down.  Another possibility is that wave 1 down is bottoming now, and wave 2 up will correct a significant portion of the recent decline over the next few weeks. In either case, once the corrective rally I see coming, either small or large, completes, the heart of the Wave 3 decline should begin dropping the indexes to new lows.  

The key to the next decline is the 30,000 level.  This level is the neckline of the Dow’s Rounding Top Pattern.  This large pattern also has a smaller Head and Shoulders Pattern that has an intermediate term target near the 26,500 level. So as long as the Dow is trading below 30,000, the odds are high that 26,500 will be reached.  The only question I have now is how it will get there.  Truth be told, the wave pattern is too complex and too jumbled for me to make any sense out of it right now.  The only thing I can say for sure is that it’s in the middle of a major Wave 3 down. Other than that, your guess is as good as mine.

The main reason I feel a bounce is coming has to do with chart of the S&P.  The decline on the S&P has been more in the form of a large descending triangle or falling wedge.  When I count the waves, it appears that Wave 1 down is complete. If this is the case, the S&P could retrace to the 3,900 level before Wave 3 down begins.  There’s also an alternative that it could form a more complex zig-zag or flat pattern where the index could rally to the 3,900 to 4,000 level, then fall back to about 3,850 and then rally to the 4 200 to 4,300 level before Wave 3 down begins.  If this is the case, it means that the next series of major down waves won’t begin until August.

The situation on the Russell 2K is even less clear, at least for the short-term.  Longer term, its very clear!  That’s because for the past 20 years, the Russell has been trading in a well-defined channel. The lower trend line of this channel is near the 1,500 level.  On Friday, the RUT closed at 1,666. So, here’s the deal:  If the RUT’s rising lower support line, currently near 1,500 is broken, the next support level is near the February 2020 low of 966.  These simply is no other support if 1,500 is broken.  Well, actually there is, but you have to go all the way back to March 2009, when the index was trading near 343.  I’m telling you this because of the EXTREME measures that must be taken if 1,500 is broken.

Here’s my Bottom Line:  I believe the indexes will bounce early next week to relieve the oversold conditions.  How far, nobody knows. The charts, except for the S&P, are too unclear at this point to make any useful predictions.  The ‘bounce’ or ‘correction’ could last anywhere from a few days to a month (if a zig-zag develops).  But once this ‘bounce’ completes, all hell is going to break lose dropping the indexes to new lows.  If the Dow’s bounce is weak, I’ll lower my current target of 26,500 another 1,000 points.  The thing to watch now is what happens during the next 2-3 days.  If after a small bounce, the Dow starts to move lower, watch for a break of Friday’s low of 29,653.  A break of the level means the Dow will try to fill the large gap near the 28,323 level from 6 November 2020.  In other words, below 29 653 will cause me to buy SDOW for a trade down to 28,323+/-. Also, just so you know, IF 29.653 is broken, the odds for a target near 25,500 or lower will skyrocket higher.  

The Dean’s List and the Tide are negative.

The Market Timing Indicators on the Dow, NASDAQ, S&P (SPY) and RUT remain negative. The Scalp Trading Indicators on the Dow, S&P (SPY), NASDAQ (QQQ) and RUT are also negative.  Pay attention to the Red Arrows.

The Sector Ratio fell to 0-24 negative after Friday’s session. There were no strong sectors. This is by far the weakest sector List I’ve seen in years. The top five weak sectors are Media (-7), Retail (8), Service (-7), Material (-7), and Healthcare (-7). Continue to avoid these weak sectors as they will likely lead the market lower as Wave 3 down unfolds.

My Doctors Trade with TZA has been OUTSTANDING!!!!  If you have some time, go check it out.  The Green Arrow put you into the trade on 9 June at 35.83.  As of Friday, the trade was still on a Green Arrow with TZA at 50.57. That’s a profit of 42 percent on this run-up alone!!! …in 7 trading days!!  If you add this to the profits already made since mid-November, by taking all Green Arrow trades and exiting on the Red Arrows, it puts you in the stratosphere when compared to keeping money in the bank or under the pillow.  Who needs cryptos or options?  No, we have the Doctor’s Trade!!!!

I see no reason to change anything now with the trade.  Just watch for a Red Arrow.  BTW, can you even imagine what might happen with this trade IF the RUT starts to break below 1,500?  Wow!!!

My Best Bets are still the inverse index ETFs.  Especially on any rallies.  Just watch the arrows, moving to the side lines if you see red.

Still no change in my comments on Bonds, crypto, or gold.  I still don’t see any reason to own them now.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

06-21-2022

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.