Weekend Strategy Review December 19, 2021

Posted by OMS  at December 19th, 2021

Stocks fell hard yesterday on an exceptionally high volume of a whopping 17.8 billion shares. The large decline was predicted by Thursday’s small change signal in the A-D Oscillator.  One of the things that contributed to Friday’s high volume was that not only was it a triple witching options expiration day, it was also a day when the indexes were being re-weighted and re-balanced.  And while Thursday’s early rally and late decline did not help to clarify the technical picture, Friday’s 532-point impulsive decline in the Dow did.  The Dow’s decline retraced all of Wednesday’s Fed rally and left us with a high probability that Wave 2 up completed as a single zig-zag.  The pattern can be clearly seen on an hourly chart of the Dow starting from the 3 December low into Thursday’s 16 December high of 36,189.

Bottom Line: It appears that Wave 3 down is now underway.  Yesterday’s decline to 35,284 could have marked the end of sub-wave 1 down of Wave 3 down.  If this is the case, the Dow could rally on Monday, possibly back to the 35,500+ level.  If sub-wave 1 down is not complete, the Dow should quickly fall below Friday’s low (35,284) and continue lower.  I don’t have a good target for the sub-waves now, mainly because there wasn’t much of a retracement on Friday.  Because of this, my next target for the Dow must be the 1 December low of 34,006.  BTW, this is where support from the 200-day moving average comes in and thus becomes a likely target.

From a strategy perspective, I continue to look for opportunities to short the Dow and the other major indexes on any rallies, especially if the rallies are followed by confirmed Red Arrows.

What I’d like to do now is talk about a few other things I’m seeing that lead me to conclude that Wave 3 down of the new Bear Market is starting…besides the picture being painted by the technical patterns.  I want to start with breadth. A few weeks ago, I talked about the concern I had with the weakening breadth in this market.  As stocks were rising to new highs, the Advance-Decline ratio on the NYSE was pushing toward new lows. After Friday’s decline, the A-D ratio turned negative for the first time in over three years. If this alone doesn’t signal the end of a Major Wave 5 up in a Major Bull market, I don’t know what does.

Another concern I have is with investor psychology.  Simply put…there are way too many Bullish investors now. The folks at SentimentTrader.com have an index they have been using for years to measure bullish sentiment.  Right now, the reading shows there are over 12 percent more Bullish investors than there were at the previous peak back in March.  This is a crazy number!   Same for the Mutual Funds…their investors are all in.  Rydex recently reported that their bull/bear ratio jumped to an incredible level of 82.2!!! Think about this for a minute.  It means that Rydex investors, which are mostly small investors, had 82 bucks invested in leveraged long funds for every dollar in short funds.  Holly cow!   This is an amazing number when you think about how Rydex got started back in 1996.  They were the first to offer an inverse leveraged ETF.  They weren’t too popular back then.  When 2007 came along, the Rydex bull/bear index hit an all-time peak of 2.5 to 1.  That ratio was enough to drop the S&P by 58 percent over the next 18 months.  Now it’s at 82+ percent!.  So, add this to the pile of mounting evidence. Just don’t ignore it.

OK, enough reflecting on the past.  I can go on and on, but I hope I’ve given you a few other things to think about, besides the deteriorating technical picture.

Now I want you to focus on this.  The Dean’s List and the Tide are now negative.  This is the first time in a looong time that the Dean’s list has joined The Tide in negative territory.  If you want to use my Top Stock Strategy, the List you now want to use is the Dean’s List.  That’s where you will find the strongest stocks (ETFs) which are now mostly inverse index ETFs.  The reason I want to trade inverse index ETFs in this Bear Market is to avoid surprises that could occur when you short individual companies. Basically, there’s strength (or weakness) in numbers.

The Market Timing Indicators for the Dow, NASDAQ, and S&P are now negative.

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

The Sector Ratio stayed at 14-10 positive after Friday’s session.  The top five strong sectors were Service (3), Household Products (3), Semiconductors (3), Healthcare (3) and PharmaBio (2).  The top five weak sectors were Energy (-3), Media (-2), Leisure (-2), Banks (-2) and Transportation (-2).

My strategy for the next few days:  I continue to watch for downside follow-through.  However, like I said above, if the market rallies on Monday, I will be looking for opportunities to short the indexes on any Red Arrow.  The Russell finished higher on Friday, gaining 21.47 points. The index, which is also on Sell Signal, is still flirting with neckline support.  With IWM, the ETF I use to make my trading decisions on the Russell, the neckline support is near the 212 level.  If this level is broken, my next target is the 180 level, which is close to where the 200-week moving average is located.  Last week, IWM dropped below its 200-day moving average at 218.73 and will likely make another attempt or two to break above this level.  The attempt will likely fail and when it does, IWM should start a major decline. Continue to watch the 212 level and look for Green Arrows on a 4-hour chart of TZA, the 3X inverse leveraged ETF for the RUT.  As of Friday, I’m still on the side-lines with my trade in TZA.  So far, the trade has produced a gain of 60 percent.

Gold appears to have completed a small wave 2 up within an overall bearish pattern.  Last week, I talked about how gold could rally to the 1,815 level before heading lower.  On Friday, the metal got as high as 1,814.56 before declining to 1,797.  If I’m right about the pattern, the next wave down should drop gold back down to the 7 August low of 1,677.  A break of the 1,770 level would be a good sign that the decline is underway.

I’m still on the side-lines with cryptos. GBTC is still on a Sell Signal and my VTI indicators shows it’s now in a downtrend.  I will need to see a lot of improvement in the crypto before I become interested in them again.  Forget them for now.

I’m starting to add to my inverse positions in inverse index ETFs.  All I’m doing is waiting for Green Arrows to appear on the 4-hour charts.  Once I have a Green Arrow on the 4-hour chart, I’m using a 12 or 15-minute chart to add to the positions.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

12-20-2021

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.