Professor’s Comments December 21, 2021

Posted by OMS  at December 21st, 2021

Stocks fell hard again yesterday, with the Dow (DIA) quickly breaking below Friday’s low of 35,284 signaling that wave 1 of Wave 3 down was continuing.  The blue-chip index hit a low of 34,664 before bouncing to 34,932 at the close.  It was down 433 points for the day.  So far, since Wave 3 down started, the Dow has dropped a total of 1,524 points, from high to low, in three days. That impulsive behavior identifies the decline as a Wave 3.

Yesterday’s selling pressure was even more intense than Fridays with 4.33 stocks down for every one that rose.  Same for the volume as down volume on the NYSE was a whopping 81.7 percent vs .63.4 percent on Friday.  With this kind of selling pressure, the indexes could easily continue lower over the next week or so before bouncing.  However, a strong case can be made that wave 1 of Wave 3 down ended at yesterday’s low of 34,664 and the subsequent rally off that low was the start of sub-wave 2 up.  If this is the case, sub-wave 2 up should continue today.  Once this sub-wave rally completes, wave 3 of Wave 3 down should drop the Dow down to the 1 December Wave 1 low of 34,007 or lower.   BTW, at this point, because we only have a wave 1 to deal with, I cannot estimate how strong the wave 2 retracement rally will be. It could be anywhere from 38 to 62 percent of wave 1 down.  However, yesterday’s opening gap down started from Friday’s low of 35,284, so it’s possible that the wave 2 rally could try to close that gap (Close the window).  If this happens, it would be a slightly more than a 38 percent retracement of the Wave 1 decline.

The Dean’s List and the Tide remain negative.  The Market Timing Indicators for the Dow, NASDAQ, and S&P remain negative.

The Scalp Trading Indicators for the same indexes are also negative.

The Sector Ratio stayed at 14-10 positive after Monday’s session.  The top five strong sectors were Semiconductors (3), Household Products (3), Healthcare (3), PharmaBio (2) and Food Drugs (2).  The top five weak sectors were Energy (-2), Media (-2), Banks (-2), Leisure (-1), 2), and Cap Goods (-1).

My strategy for the next few days: After watching the market action for the past few days, the odds are now overwhelmingly in favor of the downside. Because of this, I will look for opportunities to add to my existing positions in inverse ETFs.   

Four Sister Trades:  The four sisters are the Dow, S&P-500, NASDAQ and little sister, the Russell 2K.  So far, I have been focusing on my Arrow Trade with TZA on the 4-hour chart.  TZA is a 3X inverse leveraged ETF for the Russell 2K.   I’m using TZA to short the Russell mostly because I believe it is the weakest index technically and will be the hardest hit once interest rates begin to rise and the availability of money starts to dry up.  However, IWM, the ETF for the RUT has still not broken convincingly below neckline support near the 210-212 level and until it does, IWM will likely waddle around this support level for the next few days.  Yesterday, TZA generated a Green Arrow on the 4-hr bars, so I will be using the shorter-term bars, like the 12s or 15, for an opportunity to add to my current position. 

Last Friday, both the Dow and S&P generated Red Arrows on their 4-hour bars, and the two inverse ETFs I’m using to trade these indexes, SDOW and SPXU, had nice days yesterday.  If the Dow and S&P rally today, I’ll look for opportunities on the shorter-term bars to add to these positions as well.  SQQQ, the inverse ETF I’m using to trade the NASDAQ also generated a Green Arrow yesterday, so if you’re into shorting technology, this is something you can consider. However, technology stocks, especially the semis, are still one of the strongest sectors, so I am mostly focusing on the other three sisters.

BTW, speaking of technology, the NYSE FANG index, ETF symbol FNGG, has been on a Red Arrow since 9 December on its 4-hour chart.  So, if you really wanted to focus on the FAANGS plus a few others, this is one way to do it.  The way I use FNGG is to watch for a Red Arrow and then buy an inverse ETF like SQQQ.  I never want to be long SQQQ when there is a Green Arrow on FNGG.  Never.  It’s just too dangerous!  

BTW, yesterday, FNGG broke below a major trend line that has supplied support since mid-April.  So, if you still own FAANG stocks, you might want to watch the Arrows on FNGG very closely.  You all know how I feel about the FAANGS.  They’re very exciting to own and trade in a Bull Market, but once the Bear comes around, they could get eaten up very quickly. The Red Arrow on FNGG should be a MAJOR red flag to holders of technology. 

Gold (GLD) generated an unconfirmed Red Arrow yesterday on the 4-hrs.  I’m still on the side-lines. 

Same for the cryptos.  GBTC is still on a Sell Signal and my VTI indicators shows its downtrend is continuing.  I’m just watching for some improvement in the indicators.  Don’t see anything yet.

I’m also starting to watch the Dollar and the Euro closely.  The Euro has been in an extended decline since topping on 25 May.  However, the price is starting to stabilize and could be forming an intermediate-term bottom. I’m not a big fan of the Euro, but I do watch it for opportunities it can produce in the dollar and gold.  Right now, its still not telling me anything, but if it starts to rise, it could signal that changes are coming in the metals, the dollar, and interest rates.  It’s on the back burner for now…

Here’s my overall strategy for trading this Bear Market:  All I’m doing is waiting for Green Arrows to appear on the 4-hour charts of the four sisters.  Once I see a Green Arrow on the 4-hour chart, I’m using a 12 or 15-minute chart to add to these inverse positions. 

That’s what I’m doing,

h

Market Signals for

12-21-2021

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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