Weekend Strategy Review March 27, 2022

Posted by OMS  at March 27th, 2022

Stocks traded in a choppy sideways pattern on Friday, with the Dow and S&P filling the gap from 16 February.  In doing so, the pattern on the two indexes changed from a double zig-zag back to a single zig-zag.  When yesterday’s high reached 35,824, it made the prior counter-trend rally from the 24 January low to the 9 February high equal to current wave ‘c’ rally that began on 24 February. So, with the counter-trend waves now equal in length, corrective Wave 2 up should be complete. From a technical perspective, the next major decline, Wave 3 down should start soon.

One of the reasons I believe that the current rally in the indexes is a corrective and not something else has to do with the number of advancing vs. declining issues. The AD Line indicator in AIQ’s Trading Platform shows that the indicator reached a high on 8 November, two months before the Dow peaked at 36,565 on 5 January.  The indicator showed clear negative divergence on 5 January and has continued to decline ever since. And while the Dow has been rallying for the past few weeks, the AD Line indicator has essentially been flat-lining.  In other words, there not a lot of advancing issues taking part in the current rally. This is NOT what you would expect to see if the current rally was the start of a new Bullish trend.  The pattern on the AD Line is much more consistent with what one might expect in a counter-trend Wave 2 rally that is running out of gas.

I’m seeing the same thing when I look at the charts of the NASDAQ and Russell 2K.  The 22 March high of 208.79 on IWM, the ETF I use to track the RUT, still is intact.  So, I’m still labeling this high as the completion of Wave 2 up. At 208.79, it is a 0.382 Fibonacci retracement of the Wave 1 decline from the 8 November top into the 24 February low. If IWM stays below 208.79, the odds are high that my wave count is correct and the next major wave down, Wave 3 down, should start soon.  If 208.79 is exceeded, the pattern will likely morph into a double zig-zag, which will take more time to complete and result in slightly higher prices. Thursday’s low of 202.73 is the key level to watch on IWM.  If this low is broken, it will increase the odds that Wave 3 down is underway. 

BTW, if Wave 2 up on IWM is not complete, one more push toward the 10 February high of 209.05 should do the job.  This would make the rally off the 24 February low an a-b-c pattern which would form the final wave of a double zig-zag.

Pay attention to what’s happening on the Russell now.  It is by far the weakest index and should continue to be affected by an economy that is beginning to feel the effects of inflation and higher interest rates. Small businesses with are going to get hurt the most by the anti-business policies of the Fed and the current administration. That’s why I’m using the TZA/TNA combo for my Doctor’s Trade. Watch for the next confirmed Green Arrow on the 4-hour bars of TZA.  The momentum bias indicator on TZA is showing significant positive divergence on its 1-hour chart.  If the bias turns positive and is accompanied by a confirmed Green Arrow, I’ll buy a few ‘trial’ shares for my Doctor’s Trade.

Please take all necessary precautions to protect yourself.

After Friday’s action, the Dean’s List and The Tide remain positive. 

The Market Timing Indicators for the Dow, S&P, and NASDAQ are positive.

The Scalp Trading Indicators for the Dow, S&P, and NASDAQ remain positive.

The Sector Ratio remained at 12-12 neutral after Friday’s session. The top five strong sectors were Energy (8), Material (5), Insurance (2), Food Drugs (2) and Foods (2).  The top five weak sectors were Autos (-4), Household Products (-4), Consumer Products (-4), Semiconductors (-1) and Technology (-1).  Students should note how the Sector Ration has remained neutral during the current rally. If the rally was the start of a bullish move, I would expect to see much more strength from the sectors.  Also, any rally led by defensive sectors like Materials, Insurance, and Food is always suspect.

Gold: GLD is still on a Green Arrow on its 4-hour chart. Gold still appears to be completing the handle of a large bullish Cup and Handle Pattern.  As the ETF moves sideways, the Bollinger Bands continue to tighten.  As long as the indicators remain positive, gold could be a nice place to be in the months ahead.  Gold closed at 1,955 yesterday.  The key level to watch in gold (the metal) is now 1,924.  If gold drops below this level, it will void the current bullish pattern and signal that more decline is coming.  I still believe that gold is going a lot higher in the months/years ahead, but the short-term picture is still problematic.

I still believe the best bets for next week are in the inverse index ETFs.  The patterns for Gold, Bonds and Cryptos are still not clear or complete.  They could easily morph into other more complex patterns which will take more time to complete.  I’m mostly avoiding them for now, but I do have a few trial shares of UGL working on the 4-hour bars.  

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

03-28-2022

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.