Weekend Strategy Review July 24, 2022
Posted by OMS at July 24th, 2022
Stocks were mostly lower yesterday on relatively light volume. The Dow reached an intraday high of 32,219 before pulling back to close at 31,899, down 137 points. The Dow was up 611 points for the week. The NASDAQ and S&P finished down 226 and 37 points, respectively. Volume on the NYSE came in at 92 percent of its 10-day average. There were 16 new highs and 45 new lows.
Yesterday’s early Dow rally to 32,219 filled the gap between 32,053 and 32,272 from 9 June. In earlier Comments, I mentioned this gap as a potential target if the Dow exceeded the 32,000 level. So, with the gap partially filled and five waves complete, it’s possible that final wave ‘C’ up of Wave 2 up is complete. If not, the Dow could stage an early rally on Monday to the 32,272 level to completely fill the gap before starting to decline. Any impulsive move to the downside now would be a sign that Wave 3 down is starting.
Students should take some time this weekend to look at a weekly chart of the Dow to see its Rounding Top Pattern. It’s classic! Currently, the Dow is trading between its 50 and 200 day moving averages on the weekly chart. In other words, the index is in transition. The 200, now at 29,880 is acting as support. So far, the only downside break of the 200 has been the 17 June low of 29,653. This low was what I’m calling wave 1 down of Wave 3 down. When prices break a 200-period moving average, its perfectly normal for them to stage a short-term rally. This is what happened on the Wave 2 retracement rally that pushed into yesterday’s high. The short-term rally took over a month to complete, remember we’re dealing with a weekly chart, so from that perspective it’s still a short term rally. The thing to watch now will be what happens on a retest of the 17 June low. If that low does not hold, it will put the Dow below its 200-week moving average and that my friends is the definition of trouble. This is why the 30,000 level (29,653 in particular) is so important now.
Another thing to note about the weekly chart is the Bias. Note how during the current retracement rally the Bias has remained negative. The weekly Bias turned positive in late June 2020, just after the Covid Crash. It stayed positive until early March 2022 as the Dow rallied to new post Covid highs. But now its negative again. And if the Dow breaks below its 200 on the weekly chart from a Rounding Top Pattern, the odds suggest it will stay negative for a long time.
Rounding Top Patterns have another nasty characteristic associated with them. Once the neck-line or in this case the 200 is broken, the decline should begin to take the form of a stair step or waterfall. The first drop will likely take the Dow down to the 28,000 level. Then after a short pause, another decline will drop it close to 26,500. After the three steps of the decline are complete, the Dow should be trading near 25,000. This is the reason we will need to pay attention as trading resumes nest week. If the 17 June low of 29,653 is broken, it will confirm that wave 3 down is underway.
As of Friday, the Dean’s List and The Tide remain positive. If these two indicators turn negative, it will be another sign that Wave 3 down is starting.
The Market Timing Indicators on the Dow, S&P (SPY), NASDAQ and Russell 2K (IWM) are positive.
The Scalp Trading Indicators on the Dow, S&P (SPY), NASDAQ, and RUT (IWM) are also positive. Students should note that the Bias indicators on 3 of the 4 indexes are still negative. The Bias on the Russell 2k is the only slightly positive indicator. Seeing slightly negative to slightly positive Bias indicators is exactly what one would expect after a Wave 2 retracement rally.
The Sector Ratio has turned negative again. After Friday’s session, the Ratio was 10-14 negative. The top five strong sector were Semiconductors (2), Real Estate (2), Financials (2), Autos (1), and Banks (1). The top five weak sectors were Retail (-3), Material (-2), Energy (-2), Insurance (-2), and Service (-2). Continue to avoid these weak sectors as they will likely lead the market lower as Wave 3 down unfolds.
I’m still on the side-lines with the Doctor’s Trade in TZA waiting for the next Green Arrow to appear. I did note that Friday’s last 4-hour bar was Green. The past two Green Arrows occurred after a first Green bar was generated, so the bar could be warning that things are about to change. I’m a buyer on any Green Arrow.
I’m still on the side lines with crypto, gold and bonds. Thursday’s Red Arrow on the 4-hour bars took me out of my trade in TBT at a break even. BTW, the Dollar looks like it topped near the 110 level. On Friday, it fell to 106.59 after tracing out 5 waves on the monthly chart. If the rally in the Dollar is complete, gold and the euro could be getting ready to rally. The charts for both indexes suggest the months long 5-wave decline is complete. Pay attention to gold next week. Remember, the period between late July and late August is usually a very good time to trade gold (and silver) to the upside. Silver has also completed 5 waves down and could follow gold higher. BTW, GLD generated a Green Arrow on Thursday’s first 4-hour bar.
Bottom Line for next week. If the indexes start to move impulsively lower, I will look for opportunities to get short using inverse index ETFs, like TZA, SDOW, SPXU, and SQQQ. I have already started to buy a few shares of SDOW and SPXU in our IRAs.
Have a great weekend.
That’s what I’m doing.
h
In the WSR I discussed how the indexes could have completed the required 5 waves of Wave ‘C’ up of Wave 2 up on Friday. So, if Wave 3 down is starting, the first step in the turning process is for the indexes to break below their previous wave 1 of wave ‘C’ highs. This is important because Elliott Wave Theory says that a wave 4 in a rising sequence cannot violate the territory of a previous wave 1 high. In other words, IF we can eliminate the possibility of the next move down being a retracement wave 4 in a rising sequence, it follows that the next move down MUST be the start of Wave 3 down. The wave 1 highs of Wave ‘C’ up on all the major indexes occurred on 18 July. They are as follows: Dow: 31,644.68 S&P: 389.09 IWM: 176.29 QQQ: 296.18 Students might want to draw a line on the charts of these major indexes. If this line is broken to the downside, the odds are high that Wave 3 down is starting. h Market Signals for 07-25-2022
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Category: Professor's Comments, Weekend Strategy Review