Weekend Strategy Review July 17, 2022

Posted by OMS  at July 17th, 2022

In Friday’s early Comments I discussed a possible double zig-zag alternate scenario for the indexes that could rally the market back to the 8 July highs. When I posted these Comments, the Dow was trading about 70 points higher in the pre-market, close to the level it had been for most of the night.  Because of this, I gave the alternate scenario low odds.  However about 20 minutes after posting the Comments, the Dow started to rally and was up about 400 points going into the open. It became obvious that my alternate scenario was in play, that Wave 2 up was not complete, and the market would rally into the end of the 15-20 July turn window.  So now you know why I hate trading retracement Wave 2s.

For the past five weeks, the market has gone nowhere.  Since the 16-17 June lows, the individual indexes have been tracing out a series of complex waves that continue to suggest that once complete, will resolve to the downside.  But we’re not there yet.  Whenever the market started down, I mentioned how I wanted to see it make an impulsive move that would cause the Dow to break below the key 30,000 support level.  I said that this would confirm the start of Wave 3 down. This never happened.  The market continued to chop around forming as series of up-down-up waves…going nowhere.  I couldn’t stand it anymore.  All the indexes looked like they completed simple a-b-c patterns needed to complete Wave 2 up.  We were at the start of a major turn window. Hmm?  The market should start heading down!  If not, something else had to be going on.  That’s why I posted the Comments on the double zig-zag.  It’s why I now believe that the Dow will rally toward the 28 June high of 31,885 before Wave 2 up completes.  There’s also a gap near the 10 June open near 32,000 that could get filled. This gap down started the wave 5 decline of Wave 1 down, so it’s very possible that this level could be re-tested. A similar gap on the S&P is near the 3,975 level.

Now, having said all that, I want you to remember that we’re dealing with a wave 2.  These waves have a mind of their own.  There are no guarantees. So, it’s also possible that the Dow could rally above its 8 July of 31,511 but not exceed the 28 June high of 31,885.  This would satisfy the minimum requirement for an upward flat pattern.

Bottom Line:  The odds are high that the Dow will exceed Friday’s high of 31,285 sometime next week. However, because of the many possible patterns that are in play now, the rally could be anywhere between 31,511 to 32,000+. Once this rally completes, the next significant decline, Wave 3 down, should begin.

I’m giving you these target ranges now because IF the market starts to rally on Monday, I will start looking for Green Arrows on inverse index ETFs, like SDOW, SQQQ, SPXU and TZA. 

I’m still using a downside target range between 26,500 to 28,000, with 25,000 possible.  A move below the 17 June low of 29,653 would confirm that Wave 3 down is underway on the Dow.  I’m using a break below last Thursday’s low of 1,685 to confirm the start of Wave 3 down on the Russell. The RUT was the weakest index on Friday, and at 1744, it is still below its 8 July high of 1,780 and 28 June high of 1,792.  I will start looking for Green Arrows on TZA If the RUT starts to approach either of these potential targets.  

The Dean’s List has turned neutral. The Tide is positive.  

The Market Timing Indicators on the Dow, S&P (SPY), and Russell 2K (IWM) are negative.  The NASDAQ is neutral. 

The Scalp Trading Indicators on the Dow, S&P (SPY), and RUT (IWM) are also neutral. The same indicators on the NASDAQ are positive.

Strangely, the Sector Ratio weakened to 2-22 negative after Friday’s session.  The top two strong sector are Telecoms (1) and Real Estate (0). The top five weak sectors are Retail (-6), Material (-6), Media (-5), Energy (-5), and Service (-4). The RS rankings of the top 5 weak sectors weakened on Friday. Hmmm?   Continue to avoid these weak sectors as they will likely lead the market lower as Wave 3 down unfolds.

I sold my shares of TZA early Friday after seeing the Red Arrow. Latest profit on the trade was 1.61 points. Not much of a gain for this trade but given the way Wave 2 has been bouncing us around, I’ll take it. I’m on the side-lines now, waiting for the next Green Arrow to appear.  Like I said, the next Green Arrow on TZA should occur after the RUT approaches the 1,780 to 1,792 level.  But even if the RUT does not approach these target levels, I will re-enter the Doctor’s Trade on the next Red Arrow. 

I’m still on the side lines with crypto and gold.  I’m still watching for a bottom in gold, mostly because of the pattern and the positive season bias in gold between late July and late August.  But I’m no longer watching Bonds. I started buying a few shares of TBT, the inverse ETF for Bonds.  That’s because Bonds appear to have completed their Wave rally in early July.  If I’m right, Bonds should begin a Wave 5 decline into mid-late August. Right now, the long bond is trading near 140.  My chart suggests 125.  That’s a big move for Bonds. I’ll be trading TBT on the 40hour bars…like a Doctor’s Trade.

Same for gold. Gold appears to have completed five waves down. This is the longest decline for gold in over 5 years.  If I’m right, gold could see a short-term bounce that could take it back to the mid-1,800s. After that, we’ll have to see how the pattern develops. Gold (the metal) closed at 1,706 on Friday.  I’ll be buying the next Green Arrow on the 4-hour bars.

Also, you might have seen that MARA is back atop the MWL and are wondering,” What gives?”  Hmmm?  Keep wondering. Looks like a dead cat bounce to me.  Yeah, crypto is EXTREMELY oversold now, but oversold stocks can remain oversold as they continue to move lower.  I’m not doing anything with crypto until I see that Bitcoin solidly holds 20,000 and start moving higher in a Bear Market for equities.  So far, Bitcoin and the miners have acted like just another stock. Some cryptos, like Luna, have gone bankrupt. There’s way too much hype and not enough meat for me to be trading anything related to crypto at this time. 

Have a great weekend.

That’s what I’m doing.

h

Market Signals for

07-18-2022

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.