Professor’s Comments July 19, 2022

Posted by OMS  at July 19th, 2022

Stocks rose early yesterday; then fell hard into the close. The Dow reached an intraday high of 31,644 before falling 572 points to close at 31,072, down 216 points.  The NASDAQ and S&P finished down 92 and 32 points, respectively. Volume on the NYSE came in at 100 percent of its 10-day average. There were 17 new highs and 50 new lows.

There was a small change in the A-D oscillator yesterday, so we need to be on the lookout for a Big Move within the 1-2 days. The indexes are now in the middle of the 15-20 July turn date window I previously discussed, where major turns can occur.  

In the WSR, I discussed how the Dow would likely rally to somewhere between 31,511 to 32,000+ before Wave 2 up completes. So, yesterday’s intraday high of 31,644, which exceeded the 8 July high, satisfies that requirement. The NASDAQ and S&P did not exceed their 8 July highs, which is a non-confirmation of yesterday’s rally in the Dow.  So, today’s question is did Wave 3 down start with yesterday’s decline or will the indexes make one more push higher before Wave 2 up is finished?  We should know in the next day or so.

BTW, with the Dow now down over 5,000 points from its January high, you might be wondering if stocks are starting to become cheap again?  Well last year, when I was talking about stocks being overvalued, the Shiller Index was just over 32. Yesterday the index closed at 28.74.  So, stocks are still NOT cheap!  At the 2009 low, the index was at 15!  After the 1929 crash and into the depression that followed, the index was below 5!  So, if you think this Bear is getting close to being anywhere complete, fuggedaboutit! 

BTW, the Shiller Ratio is basically an adjusted P/E ratio. It measures how much you have to pay for each dollar of earnings in a stock. Last year, before the market topped, stocks like Netflix and other FAANG stocks were trading at over 100 to 300 times each dollar of earnings. Back then, NFLX was trading near 700. Now its at 199 with a more realistic P/E close to 17. So think about the Shiller Ratio being at 28.7 the next time someone tells you stocks are cheap. They’re not! They’re still way overpriced by historical measures.

I’m still using a downside target range for the Dow between 26,500 to 28,000, with 25,000 possible.  A move below the 17 June low of 29,653 would confirm that Wave 3 down is underway on the Dow.  I’m using a break below last Thursday’s low of 1,685 to confirm the start of Wave 3 down on the Russell.  

The Dean’s List is neutral. The Tide is still positive.  

The Market Timing Indicators on the Dow, S&P (SPY), and Russell 2K (IWM) are negative.  The NASDAQ is positive. 

The Scalp Trading Indicators on the Dow and S&P (SPY) are neutral.  The same indicators on the NASDAQ and RUT (IWM) are positive.

The Sector Ratio was 3-21 negative after Monday’s session.  The top three strong sector are Telecoms (2), Leisure (1), and Real Estate (0). The top five weak sectors are Material (-4), Energy (-3), Media (-3), Insurance (-3) and Service (-2).   Continue to avoid these weak sectors as they will likely lead the market lower as Wave 3 down unfolds.

I’m still on the side-lines with the Doctor’s Trade in TZA waiting for the next Green Arrow to appear.  While I was watching for a signal on the 4-hour bars, I was bustytrading TZA on the 5s. I entered the trade on the Green Arrow just after noon and got out when the Red Arrow appeared at the 15:15 mark.  The trade was good for 2 full points.  It was the easiest trade I made this year, mostly because I saw the Dow and the other indexes near my target levels, so I was looking for entry points on the inverse index ETFs.  I just wanted to get in and the having the Arrows made it easy!

I also started to buy a few more shares of TBT, the inverse Bond Fund, yesterday. Bonds appear to have completed a Wave 4 retracement rally last week and should be moving lower.  If I’m right, the Wave 5 decline should last into mid-late August. Yesterday, the long bond closed at 139-04.  I’m still thinking a move down to the 125 level is in the cards. I’ll be holding TBT in both my and Marcia’s IRAs based on the 4-hour bars.  TBT is now on a Green Arrow on the 4-hour bars.

I’m still on the side lines with crypto and gold.  I’m still watching for a bottom in gold, mostly because of the pattern and the positive season bias in gold between late July and late August.  The problem I’m having with gold now is the Bias.  It’s still way to negative for me.  If you get a chance this morning, you might want to compare the Bias on GLD with that of TZA and TBT on the 4-hour bars.  You’ll see what I mean.  The Bias on TZA is positive and while the same indicator on TBT is still negative it’s rising and close to positive.  That’s why even though the Wave count on GLD looks interesting, I believe that TZA or the other inverse indexes or TBT are much more attractive trades.

Bottom Line:  With a major turn date and a small change signal on the Board, students should be looking for Red Arrows on any impulsive move lower on the indexes.  I will be trading TZA, SDOW, SQQQ, and SPXU.

That’s what I’m doing.

h

Market Signals for

07-18-2022

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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