Professor’s Comments October 25, 2022
Posted by OMS at October 25th, 2022
Stocks rallied yesterday. but the rally was weaker than Friday’s rise in terms of breadth and volume. The Dow finished with a gain of 417 points, closing at 31,499. It reached an intraday high of 31,603. The NASDAQ and S&P were up 93 and 45 points, respectively. Volume on the NYSE came in at 106 percent of its 10-day average. There were 66 new highs and 333 new lows. From a pattern perspective, both the Dow and S&P have now reached the upside targets I had for wave 2 up. The retracement on the S&P has been exactly 38.2 percent of wave 1 down. The RUT just missed the exact 38.2 percent number and only reached 36 percent. Close enough. So now all we need to see is a change in indicators. The next down wave should be wave 3 down of minor wave 3 down of Major Wave 3 down. It could start at any time now. It’s also possible that wave 5 up of wave 2 up could carry a bit higher before wave 2 up is complete. This is especially true on the NASDAQ-100, which has only retraced 31.4 percent of wave 1 down. If wave 2 on the NASDAQ-100 is not complete, it could try to fill the gap from the 6 October close which is near the 11,385 level. Basically, wave 2 up on all the indexes has developed into a complex 3-3-5 flat pattern and many times the final wave of this pattern has an ‘through-over’ leg. If this ‘through over’ rally occurs, it should complete within a few days. I’m still using the 26,500 to 28,000 level as my first downside target for the Dow. I still believe that once things get going, 24,000 -25,000 is possible. Nothing happened during the October rally to alter the structure of the overall pattern for me to change my downside targets. My downside target for the S&P is still near the 2,600+/- level. I’m also using a target between 130-135 for IWM, the tracking ETF I use to track the Russell 2K. At this point, the NASDAQ appears weaker than both the Dow and S&P, so for now, I’m still using a target near 9,500. But just like I have a ‘possible’ downside target of 24,000 on the Dow, I’m using 9,000 or below as a ‘possible’ target for the NASDAQ-100. One of the reasons I’m pretty negative on the NASDAQ now is the performance of Cathy Wood’s ARK Innovation fund. Her fund was down 45 cents yesterday while the Dow was up 417 points. Last week, the fund closed at its lowest level in 5 years. Talk about a crash…the fund is now down 62 percent year to date. Nineteen months ago, ARKK was trading at a high of 159.70. Yesterday it closed at 35.43. Nobody is interested in ‘innovative’ technology now. Most people just want to survive this Bear Market. BTW, if you pull up a 3-year weekly chart of ARKK, you will see that my ‘Arrows’ system nailed calling the top in AARK. Maybe Cathy should purchase my system. Her clients would probably be loving her now instead of tossing tomatoes at her and calling for her head. The decline in ARKK was totally predictable, because her fund…like any fund MUST be 96-98 percent invested in stocks and only have a few bucks in cash. Once the Bear starts to growl and the inflow of cash declines, Cathy, like most fund managers, had to sell stock to raise cash. The combination of declining cash inflows and stock sales was a major contributing factor to the current Bear Market. And as the country moves further into recession, I expect the declining cash inflows and stock sales to continue at a faster pace. It’s going to get ugly! In terms of time, I’m still thinking the 8 November mid-term elections will factor into the time period for the decline. Students should continue to keep their eye on several things as the elections approach. 1. The VIX – Right now its still near 30. If it moves above last week’s high of 34.5, it will spell trouble for the overall market. 2. The 21 October low of 30,206 is now a key level. A break of this low will be an early warning sign that wave 3 down is starting. If this happens, the next major step is a break of the H&S neckline now near the 29,000 level. 3. I’m watching the Arrows on a 5-day, 15 min chart of the Dow (DIA). Yesterday, the Bias indicator started to show negative divergence on the 15s. Also, on the penultimate bar of the day, DIA generated a confirmed Red Arrow. Let’s see if that early warning sign continues. The Dean’s List has turned neutral. The Tide has turned positive. My custom VTI indicator is still showing no trend which continues to support the scenario that the current retracement is part of a wave 2 up. The Market Timing Indicators for the Dow have turned positive. The same timing indicators for the NASDAQ are neutral. The Sector Ratio strengthened to 3-21 negative after Monday’s session. The three strong sectors were Energy (6), Cap Goods (0), and PharmaBio (0). The top five weak sectors were Semiconductors (-6), Telecoms (-6), Retail (-6), Household Products (-6) and Consumer Products (-6). Students should note the huge difference in RS values between the strong and weak sectors. Bottom Line: Continue to watch how retracement wave 2 up unfolds. Just remember, wave 2s are EXTREMELY difficult to trade. If you trade them, use the short-term bars and exit your positions by the end of the day. Watch the Bias on the 4-min bars on the inverse index ETFs at today’s open. If it starts out negative, it could be a nice day to trade the Arrows. That’s what I’m doing, h Market Signals for 10-25-2022
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The Hockey Stick Pattern
The Creation of Waves and Trends
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Category: Professor's Comments