Weekend Strategy Review February 13, 2022

Posted by OMS  at February 13th, 2022

In Thursday’s comments, I talked about how the Dow was pushing higher toward two gaps that were potential targets for ending the counter trend rally.  What I didn’t mention was that while the Dow was moving higher, it also created several upside gaps during the move.  These ‘gaps’ turned out to be ’exhaustion gaps’ and when the Dow fell below these gaps during the past two days, it created an ‘island reversal’, negating the existing bullish patterns on the indexes and ending the counter trend rallies.  I said “we need to be on our toes…. the current rally could end at any time now.”

After looking at the past two days of impulsive decline of 527 and 503 points, it appears that the next series of down waves has started.  If you put the decline under a microscope, you will see that it occurred in five distinct waves.  Friday’s 503 point plunge was likely the completion of the decline that started on 9 February.  I’m labeling it wave 1 of Wave 3 down for the Dow, S&P, and NASDAQ.  

The reason for this labeling is it appears that Wave 2 up on the Dow which started from the 24 January low of 33,150 developed as a double zig-zag or 3-3-5 pattern.  If you pull up a 15 min chart of the Dow, the a-b-c nature of the first two wave which was followed by a five-wave rise for Wave ‘c’.  When I look back, it appears to be right out of a textbook.  A classic wave 2 retracement rally.

So yesterday, when the Dow broke below support provided by the lower trend line of the Wave 2 rally, the rout was on. When the Dow broke below the wave ‘a’ high of the double zig-zag, located at 34,815, it eliminated all near-term bullish patterns and confirmed that Wave 3 down was underway.

Does this mean that we’re going to crash on Monday?  Hmmm?  Probably not.  It’s more likely that early next week, the market will waddle around doing some backing and filling in a small wave 2 retracement before the real damage starts.  Remember, the target for the recently broken Ending Diagonal (ED) pattern is the 24 January low of 33,150 which is where the ED started.  ED’s are very reliable patterns as far as targets are concerned, so at this point, I don’t have any reason why the 33,150 level won’t be tested this time.

The 4-hour bars on SDOW, the inverse leveraged ETF for the Dow, generated a confirmed Green Arrow on Thursday at the 27.41 level.  My target for the trade is above the 24 January high of 33.84.  Could be more.

Same for the SQQQ which was one of the indexes I was trading the past two days.  It generated a Green Arrow on its 4-hour chart on Friday at the 37.40 level.  My target for the trade is above 48.08.

The Russell was also good to me for the past few days, even though IWM pushed slightly higher than I expected.  However, at the end of the day, it was a big winner as I traded the arrows on the shorter-term bars.  Late in the afternoon, TZA finally generated a confirmed Green Arrow on the 4-hour bars at 33.30, putting the Doctor’s Trade back into play. So far, the trade has produced a 145 percent profit on three Green Arrow trades.  We’ll see if it can add to the profit line this time as my target is above the 43.34 level. BTW, I will have several trades going on the RUT during this coming decline.  I still have the Call credit spread on IWM that I set up several weeks ago at the 210/215 level.  I am now holding a position in TZA based on the 4-hour bars.  And I also plan to continue scalping TZA/TNA based on the shorter-term (5-min bars).  By doing this, IF the RUT begins to move higher early next week, a scalp trade in TNA will function as a hedge against my Call Spread and my 4-hour position trade in TZA.

The same multiple position trading strategy can be used with positions on SDOW and SQQQ.

After Wednesday’s action, the Dean’s List is negative.  The Tide is still neutral.  A positive Up/Down Oscillator is keeping The Tide neutral.

The Market Timing Indicators for the Dow, S&P are NASDAQ have turned negative.

The Scalp Trading Indicators for the Dow, S&P, and NASDAQ are negative.

The Sector Ratio strengthened to 13-11positive after Friday’s session. The top five strong sectors were Energy (7), Banks (5), Leisure (4), Media (3), and Material (3). The top five weak sectors were Semiconductors (-4), Autos (-3), Retail (-2), Service (-2), and Telecoms (-2). 

Gold:  Gold rallied hard yesterday after the government announced that January prices were 7.5 percent higher than a year ago.  The increase was the highest in the past 30 years.  The announcement caused GLD to spike 3.25 points higher to 173.81. BTW, the Market Timing Indicator for gold turned positive on 7 February, at the 170.11 level.  At this point, it’s still not clear to me if yesterday’s rally was the completion of Wave 2 up, or the start of a new rally in gold.  When I look at a chart of gold, the metal, it still appears that the rally off the 15 December low could be interpreted as a double zig-zag.  However, I cannot ignore yesterday’s strong rally.  The top stocks and ETFs on the Dean’s List and MWL are mostly energy related.  However, ABX, GDX and a few silver miners are starting to move up in the rankings.  Because I believe the easier trades right now are in the inverse index ETFs, I’m just going to watch the metals for now.  I’m a big believer in only trading the top 1-5 stocks from the Lists, and right now, the metals are still not in the top 10.

Cryptos: Another sector that is moving higher on the Lists is the Cryptos. Our old friend MARA is starting to move up, joined by RIOT. The two stocks started moving higher immediately after the Market Timing Signal for Crypto turned Green on 7 February.  What did I say about paying attention when the Market Timing Indicators change direction?  The only thing that is precluding me from jumping back into the cryptos is the Arrows.  MARA generated two red bars and a Red Arrow on Friday’s 4-hour bars.  This MUST change before I can be a buyer of the bitcoin miners.  On the other hand, I love the longer-term cup and handle pattern that is developing on MARA and GBTC. If the stock/ETF can trade sideways for another 1-2 weeks, and form a nice handle, I’d love the pattern even more.  Watching.

What I’ll be trading next week:  It’s all about inverse index ETFs now.  There’s good chance that a crash wave (wave 3 of Wave 3 down) could develop later next week.  The momentum bias has shifted to the downside.  Spend some time this weekend preparing for a major decline. Remember where my downside targets are.

Have a great weekend.

That’s what I’m doing.

h

BTW, if you have an opportunity during the next few weeks, please tell your friends about our website. Since Covid shut down my classrooms at UNF and FSCJ, we no longer have a classroom to advertise the website.  So, I’m asking for your help. If you know someone who might be interested in our service, please have them contact Dave or me and we’ll set them up with a free ‘trial’ subscription. The next few months are going to wreak havoc with the investment portfolios of many of your friends and co-workers. Thus could impact their plans for a child’s education, a new home or their retirement. Please tell them that there are alternatives to just sitting there and watching their portfolios get hammered. They too can learn how to protect themselves and even thrive during the Bear Market.

Market Signals for

02-14-2022

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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.

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