Weekend Strategy Review January 22, 2023

Posted by OMS  at January 22nd, 2023

In Friday’s 10:30 Update, I said that I could count five waves down on the Dow, so sub-wave 1 down of Wave 1 down of Major Wave 3 down could be complete or is nearing completion. I also said that when sub-wave 2 up starts to retrace, I would expect it to go the 33,400 level. That’s almost exactly what happened after I posted the comments…the Dow rallied to the 33,381 level, closing up 331 points at 33,375. The NASDAQ and S&P finished with gains of 288 and 74 points, respectively.  Volume on the NYSE was moderate, coming in at 1009 percent of its 10-dat average. There were 47 new highs and 16 new lows.

From a wave count perspective, yesterday’s rally was a typical a-b-c- retracement Zig-Zag.  So, sub-wave 2 up of Wave 3 down of Major Wave 3 down could be complete or is nearly so. If this wave count is correct, sub-wave 3 down should start sometime early next week. The alternate is that the decline that started from the 13 January high into yesterday’ low was wave 4 down, which means that yesterday’s rally was part of sub-wave 5 up of Wave 2 up.  If the rally continues, and moves above the 17 January high of 4019 on the S&P, the pattern will form a Double Zig-Zag and increase the odds for a move above the 13 December high of 4101.  A break of the 3,885 level will eliminate the alternate wave count.  At this point, I believe the odds of a Double Zig-Zag forming are low, mostly because the S&P and Dow broke below my ‘Lines in the Sand’, which were the previous wave 4 lows, and the fact the sub-wave 1 down consisted of five waves.  But I must mention that the alternate Double Zig-Zag is possible, as it would be irresponsible for me not to mention it.

Since the indexes topped on 13 January, the Dow has been the weakest index shedding 1,393 points.  Its five wave decline has also been much stronger than the other indexes, as the fear of runaway inflation have subsided, which was a major concern for the small caps on the Russel 2K and NASDAQ.  But if the Dow continues to lead the market down in the weeks ahead, as I suspect, the impact of three sets of wave 3s down will be too strong for the small caps to resist.  I’m using the 11,252 level on the NASDAQ as my ‘Line in the Sand’ for that index and 1824 for the RUT.  A decline below these levels will increase the odds that sub-wave 3 down is underway on both indexes.  BTW, the key level to support the bearish case on the RUT remains at 1,904.  In other words, if the RUT says below 1,034 (188.96 on IWM), I’m bearish.

The Market Timing Indicators are currently positive on the Dow and NASDAQ.

The Dean’s List is positive. The Tide is also positive.  

The Sector Ratio weakened to 17-7 positive after Friday’s session.  The top five strong sectors were Media (4), Consumer Products (3), Retail (3), Material (3), and Cap Goods (2). The top five weak sectors were Food Drug (-2), Foods (-2), Utilities (-2), Autos (-1), and Banks (-1).

My Trades:  I traded a few shares of UDOW and TZA yesterday, mostly to hedge the April Put Options I’m currently holding on the DIA and SPY. Early next week, depending on what the market does, I’ll be looking to add to my Puts and/or start buying SDOW, SQQQ and TZA. Students can clearly see yesterday’s a-b-c retracement move on the 5 min bars of the UDOW.  The Green Arrow that occurred at the 13:35 mark was a classic wave ‘c’ move after an earlier a up-b down Stick-Blade Hockey Stick.  The wave “c’ rally was good for over 2 points and came within 0.5 points of the 58-target level I mentioned in my 10:30 Update.

BTW, during yesterday’s session, I was also watching the slightly longer 9 min bars to take the noise out of the session.  I expected the retracement would be an a-b-c affair, and the 9 min bars only produced three arrows all day.  Nice!

Things I’m watching:

Bonds:  Treasury Yields could rise another 0.50 to 0.75 percent over the next few weeks before topping. After that they should drop sharply as it becomes clear the Fed has over reacted in its attempt to control inflation and the high interest rates are destroying the economy.  In this environment, with equities falling, Bonds could be a great place to be.  Bond ETF, TMF is currently on a Red Arrow on its Daily Chart in what appears to be the start of wave ‘c’ down of Wave 2 down.  Once Wave 2 down completes, the next Green Arrow on the Daily’s should signal the start of Wave 3 up. If equities begin to fall sharply, a lot of investors will start moving money into Bonds.  BTW the yield curve remains inverted so the risk of recession remains high. Watch for the next Green Arrow on TMF.

Gold:  Gold continues to rally after generating a Market Timing Buy Signal on 27 December.  At this point, GLD has exceeded my target of 172.82, closing at 179.18 on Friday.  When the next Red Arrow appears, I’ll move to the side lines on GLD and wait until I see what develops.  Right now I’m still not sure if gold is in starting a Major Wave 3 rally or if the current rally is only a fake out within a Major wave 2. If the former, gold, the metal, could rally to the 2,500+ level.  But the odds for that happening in a recessionary environment are low.  The Dollar appears to be topping, which is another positive factor for golds bullish case.  But right now, there too many conflicting factors for me to make a case for gold either way.  I can tell you that my rare gold coins, the ones I have been salting away in my safe deposit box for years, have been going through the roof.  My coin broker called me early Thursday when I was at the Doctor’s office to say that seven Carson City gold pieces, $5 and $20, were available.  By the time I got home, 20 minutes later, the coins were sold.  My guy tells me that his clients are beginning to stash a lot of money in gold coins as a hedge against equities.   Hmmm?  Maybe gold is going to start that Wave 5 up.  We’ll see….

Crude Oil:  West Texas Crude closed at 79.86 on Friday.  It has been bouncing between 70-80 for the past few weeks in what appears to be wave ‘c’ of Wave 4 down.  Wave 3 up got as high as the 127 level back in March.  UCO, the ETF I use to trade crude oil reached a high of 55.69 back in mid-June.  It’s now trading at 31.44 with a Green Arrow and a positive Bias indicator.  If things start to heat up in Ukraine, crude oil could be a nice place to be.  Wave 5 up could easily take crude back to the 130 level, possibly as high as 150. 

Crypto and Meme Stocks:  They’re back in play.  Bitcoin has closed higher in 16 out of the past 17 sessions.  Investors never seem to learn.  GBTC, the ETF I use to trade Bitcoin generated a Green Arrow on 30 December at the 7.87 level.  On Friday, it closed at 12.18. I do not expect the rally to last…it looks like a typical dead cat bounce from extremely oversold conditions. Remember, GBTC was trading at 33.18 back in March.  When the overall market starts to head south, GBTC will likely re-test its prior low of 7.87 and move even lower.  Same for the meme stocks.

Have a great weekend.

That’s what I’m doing,

h

Also, last week, the Navy Federal Credit Union announced the issuance of an 18-month, 5 percent CD. Marcia and I quickly moved some of the money we had been keeping in various money market accounts and lower paying CDs into these 18 month certificates. The certificates can hold up to $250K, and each member can have one.  Money can be added to them up to the $250 K.  Also, NFCU transferred all of my lower paying CDs into the new higher paying product, without penalty. I’m using these CDs as a temporary place to park cash as I wait for lower equity prices, 18 months to 2 years from now.  If you’re a member, you might want to investigate this.  It was extremely easy, done over the phone in less than 5 minutes :>)

Market Signals for

01-23-2023

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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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