Weekend Strategy Review December 12, 2021
Posted by OMS at December 12th, 2021
Stocks ended the week on a mixed note. Large cap issues on the major exchanges finished higher but small cap issues on the Russell 2K finished lower. The Dow ended with a gain of 216 points, closing at 35,970. It was up 1,390 points for the week. Technology stocks on the NASDAQ also finished higher on Friday with the NASDAQ gaining 113 points.
Friday’s rally in the Dow got as high as 35,982. In Thursday’s Comments, I mentioned that the Dow would likely complete somewhere between 35,819 and 36,000, so yesterday’s rally came within a breadth of my upper target. We’ll see if that target holds when trading resumes on Monday.
The interesting thing about Friday’s rally on the Dow was that it occurred on negative breadth. The A-D ratio on the NYSE was 0.89:1. In other words, on a day when the Dow gained over 200 points, declining issues outnumbered advancers by 178. That’s right…there were 1644 stocks that declined vs.1466 that advanced. I found that amazing! Friday’s weak breadth also did not change The Tide, which still is negative. So, stepping back for a moment, what we just witnessed this week was a 1,390 point rally on the Dow that occurred with a falling Hi-lo indicator, a negative Up-Down Oscillator, a Summation Index that continues to drop, and a negative Advance-Decline Oscillator. Remember, for the A-D oscillator to be negative, more stocks have to fall than advance. In other words, on a week when the Dow gained 1,390 points, the majority of stocks did not participate in the rally. In all my years of trading, I don’t believe I have ever seen a retracement rally like this. Because of the limited participation in the retracement, I believe the next wave down, Wave 3 down, will be a dozy.
The indexes rose modestly yesterday on low volume. The Dow finished with a gain of 35 points, closing at 35,754 after reaching a high of 35,840. The NASDAQ and S&P were up 100 and 14 points, respectively. Volume on the NYSE came in at 84 percent of its 10-day moving average. There were 82 new highs and 19 new lows.
Yesterday’s rally appeared to be wave 5 up of Wave 2 up. If this is the case, Wave 2 up may have completed, and Wave 3 down should be next. In earlier comments, I discussed how wave 5 up would likely complete somewhere between 35,819 and 36,000. So, yesterday’s high of 35,840 could have done the trick. We’ll see.
From a Fibonacci view, the Dow retraced 72 percent of Wave 1 down, filling the gap from 24 November. It’s not unusual for a Wave 2 in a Bear Market to retrace about 68 percent+/-. So, if Wave 2 up is complete, we can now start making a few estimates about Wave 3 down.
Earlier this week, I discussed how the Dow could fall about 4,000 points from the Wave 2 high. Friday’s low breadth trading action only served to confirm that Bearish view.
If Wave 2 topped on Friday, I’ll be watching to see if any decline is impulsive. Remember, last week, when I talked about the Dow, I said that I needed to see impulsive downside action, otherwise, any decline followed by a small rally will likely still be part of Wave 2 up. And that’s exactly what occurred on Friday. Without impulsive downside action, Wave 2 up is NOT finished. So, continue to look for impulsive action to the downside and Red Arrows. If wave 1 down of Wave 3 down is starting, the decline MUST be impulsive. That’s the key.
The Market Timing Indicators on the Dow (DIA), S&P (SPY), and NASDAQ (QQQ) are Positive.
The Scalp Trading Indicators for the Dow (DIA) and S&P (SPY) are Positive. The same timing indicators for the NASDAQ (QQQ) remain Neutral.
The Dean’s List is still Neutral. The Tide is still Negative.
The Sector Ratio was unchanged at 15-9 Positive after Friday’s session. The top five strong sectors were Semiconductors (5), Service (4), Autos (3), Household Products (3), and Technology (3).
The top five weak sectors were Media (-3), Leisure -(2), Cap Goods (-1), Telecoms (-1), and Banks (-1).
My strategy for next week. I’m still waiting for signs that wave ‘c’ up of Wave 2 up is complete. If the Dow starts to decline, I’ll be watching for impulsive action. I MUST see impulsive action, otherwise, any decline followed by a small rally will likely still be part of Wave 2 up.
My strategy for the next few months: Because the WSR is a place where I like to discuss strategy, I want to talk about the longer-term trading strategy I developed for working professionals like my doctor friends, who can’t spend a lot of time watching their computers during the day. As most of you know, with Marcia being a transplant patient, I’m always concerned about anything that goes on with her, and I want her doctor’s focused entirely on Marcia…not what’s happening in the market. So, when she goes to have her check-ups, I know that her Doc is giving her his full attention. That’s why developed the 4 Hour Strategy, so they can be focused on my wife, make money, and enjoy their lives. Anyhow, so how’s this strategy working out?
Well, for starters, let’s look at what happened with TZA, the 3X leveraged inverse ETF for the Russell 2K. I decided to short the Russell because I believed that it was the weakest of all the indexes and that small-cap stocks would get hammered as the Bear Market progresses. I thought a 3X leveraged ETF would be the perfect vehicle to trade if the RUT declined as I expected. Anyhow, after conducting my ‘Arrows’ Class, I decided to buy TZA on 10 November, when the ETF generated a Green Arrow. At the time TZA was trading at 22.40. After the first buy, the ETF started to move higher and reached a high of 32.02 on 1 December. Five trading days later, TZA generated a confirmed Red Arrow, but the ‘Safety Valve’ took me out of the trade a day earlier at 31.30. (Remember, I use the Safety Valve whenever I have a large profit in a stock.)
I then stayed on the side lines for the next 6 days while the ETF corrected. Then on 9 December, I re-entered TZA on another confirmed Green Arrow. During this time, the overall market was rallying, but the Green Arrow once again told me it was time to short the RUT. I entered the trade at 27.67 and after 2 days of up markets, including Friday’s 216 point burst on the Dow, TZA was trading at 28.7, for another one point gain.
Total gain for the two weeks of trading was 10.04 points or 45 percent. This does not include any trades to the positive side when the RUT was rallying…. only shorts using an inverse ETF. Imagine what the gain might be if the RUT continues to fall during the next few years.
Take a look at IWM, the ETF I use to trade the Russel. If you recall, a few weeks back when IWM was trading slightly above 240, I said it would trade down to the 200 level. On its most recent dip, it got as low as 212.71. From there it bounced to 225 forming the ‘Blade’ of an inverse Hockey Stick Pattern. If you look at a weekly chart of IWM, you can see that the Hockey Stick projects a move to 200 or below, with the next level of support being the 200 moving average near 180. Beyond that is the weekly low of 95.69 made on 16 March 2020. That’s my ultimate target for IWM in this Bear Market.
So now you know why I want to trade the inverse Russell. As long as I see Green Arrows on TAZ, I’m in.
BTW, I’m also trading TZA on the shorter term bars, like the 30s. This is basically a version of my ‘Buy the Cake, Eat the Cake Strategy’. With this strategy, as long as I see “HIGH Cover’ on the 4 hour bars, I’m trading TZA on the 30s. At this point, students should take a few minutes to look at their ToS platform and examine both the 4 hour chart and the 30 min chart of TZA. So anytime I see Green Arrows on the 4 hours bars (my HIGH Cover for the 30s) I’m holding my basic position AND at the same time, I’m also trading a smaller position based on the 30s. I like to eat my cake.
OK, while I can understand why you might still be a bit about nervous trading a 3X inverse leveraged ETF, let’s take a look at another stock I have mentioned frequently on these pages. My short of SHAK. Same thing…
First look at a 30 day, 4-hour chart. From this chart you can see that a Red Arrow was generated on 8 November near the 87+ level. However, the Red Arrow was NOT confirmed until 17 November near 84. Nine days later, SHAK was trading at 68 for a gain of 16 points or about 19 percent. The stock recently generated another Red Arrow 3 days ago but was only confirmed late Friday. You might be wondering why I’m watching SHAK? The Weekly chart shows the stock is currently resting on moving average support. If this support breaks down, there’s no support until the 16 March 2020 low of 30. Do I think this will happen? Hmmm. In my life, I’ve see way too many hot dog stands that their owners turned into restaurants. Most of them failed. Restaurants are a very competitive business and managing a restaurant in a Covid environment is extremely challenging. I wouldn’t be surprised if the owners of SHAK are back selling hot dogs in NYC two years from now. If the country goes into a depression, the stand can always sell apples.
BTW, even though the spread between bid and ask can be large on SHAK, it shouldn’t worry you too much. I usually get filled with a limit order set halfway between the bid and asked price. I also use SHAK in my Buy the Cake, Eat the Cake Strategy on the 30s. Never use market orders on SHAK.
Gold, bonds and cryptos. I’m still on the sidelines….waiting for opportunities. I don’t see any at the moment.
Have a great weekend.
That’s what I’m doing,
h
BTW, next week should be very interesting as the Fed will release its final statement for the year on interest rate policy on Wednesday. It will be interesting to see if they speed up the ‘tapering ‘process after the government announced that inflation was 6.8 percent in November. That’s 6.8 percent after NOT COUNTING the rise in food or gas prices. How ridiculous is that? Also, the Bank of England and the ECB are scheduled to make major statements on Thursday. These announcements could have a significant impact on the market
Market Signals for
12-13-2021
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 10 Dec 2021 |
NASDAQ | POS | 10 Dec 2021 |
GOLD | NEG | 26 Nov 2021 |
U.S. DOLLAR | POS | 19 Nov 2021 |
BONDS | NEU | 08 Dec 2021 |
CRUDE OIL | NEG | 29 Nov 2021 |
CRYPTO | NEG | 25 Nov 2021 |
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