Weekend Strategy Review July 31, 2022

Posted by OMS  at July 31st, 2022

Stocks continued their push higher yesterday on strong volume.  By moving above the 32,500 level, the Dow appears to be tracing out the primary scenario I described earlier in the week, where it will extend toward or possibly exceed the 33,000 level. The early June highs near 33,270 are still a potential stopping point as there are eight days of strong resistance near that level.

One thing I did not see yesterday that I always look for as a retracement wave progresses is divergence in the indexes.  There wasn’t any.  This means that the current rally, wave ‘C’ of Wave 2 up, will likely extend for a few more days. On the other hand, yesterday was the third day of exceptionally strong breadth, as shown by the A-D Oscillator. Yesterday’s reading was 296.42 , the third consecutive day the oscillator came in with a reading over 200.  This means the market is EXTREMELY overbought.  When this happens, the odds are high that the rally will take a breather and pull back.  So, we could see 1-2 days of pullback early next week followed by another push higher toward 33,270.

My target for the S&P is now near the 2 June high of 4,178. This is where the earlier wave 4 topped. If this level is exceeded, the next likely stopping point is the 4 May gap near 4,300. Yesterday, the S&P closed at 4,130.

My target for IWM, the ETF I use to track the Russell 2 K, is also the wave 4 high of 190.94 that occurred on 7 June.  Yesterday, IWM closed at 187.25 after reaching a high of 187.73.

Students should remember that wave 2 retracement rallies have a mind of their own. The one thing they have in common is that they are never predictable. No two are exactly alike. They also serve to fool investors that maybe, just maybe, another Bull Market is starting. No!  Even though the current rally has been large, the charts still say it’s only a retracement rally within a major Bear Market. Once it completes, the market will fall to new lows.

The Dean’s List and The Tide remain positive.

The Market Timing Indicators on the Dow, S&P (SPY), NASDAQ and Russell 2K (IWM) remain positive.

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

The Sector Ratio is now 24-0 positive after Friday’s session. The top five strong sector were Autos (7) Cap Goods (6) Semiconductors (5), Real Estate (5) and Technology (5).  There were no weak sectors. 

One of the things students should look at this weekend is how our Arrows Trading System using the 4-hour bars performed during the latest rally. Using IWM as an example, a Green Arrow put you into the trade at the start of the wave ‘C’ rally on 15 July at 170.  A Red Arrow took you out of the trade on 22 July at 183.90 for a 13.9- point profit.  If you then shorted the stock, or bought TZA, the inverse ETF, a Green Arrow took you out of the IWM short on 27 July at 180.42 for another 3.48 points of profit.  Assuming you then went long on the 27 July Green Arrow, you would still be in the trade as of Friday with another 6.83 points of profit. That’s a total of 24.21 points of profit or 15 percent in nine trading days, just by trading stodgy IWM on the 4 hour bars. Imagine what your profit would have been if you were trading the 3X leveraged ETFs, like TNA and TZA during this same time.  Also, if you can’t trade the 4-hour bars and want to trade the daily bars, take a quick look at the Green Arrow that occurred on 19 July on the daily bars.  That Arrow would have put you in IWM at the 174 level. If you followed the Arrows on the Daily bars, you would still be holding IWM as of Friday with a 14-point profit.

Bottom Line: Follow the Arrows! We could see a lot of volatility in the days ahead.  At some point, retracement Wave 2 up will end. It could be as soon as Monday or last another week or so, but it will end. All I’m doing now is waiting for the next Red Arrow.

BTW, you can do the same thing with the other indexes, like DIA and SPY, on the 4-hour bars. If you have time this weekend, take a quick look at how the Arrows performed on these charts since 15 July when the rally started. Then start developing your strategy for attacking the market when it starts its next leg down.

Have a great weekend.

That’s what I’m doing

h

Market Signals for

08-01-2022

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.