Weekend Strategy Review May 29, 2022
Posted by OMS at May 29th, 2022
The retracement rally that started from oversold conditions on 20 May continued yesterday. It was boosted by a strong pre-holiday bias and tons of short covering from over leveraged traders. The Dow finished with a gain of 575 points, closing at 33,212. The gain helped the Dow break a string of eight losing weeks, a modern record.
So far, the rally off the 20 May low has consisted of three waves. It will need five waves before it completes. Yesterday’s rally appeared to be the completion of wave ‘c’ up in the five-wave sequence. If I’m right about this, the Dow should pullback early next week, possibly 200-300 points in wave ‘d’ down, then rally above yesterday’s high of 33,212 to complete Wave 2 up. My current target for the completion of Wave 2 up is near the 33,500 to 33,600 level. A close below 31,968 now, the 23 May high, would be a strong sign that the Wave 2 retracement rally is complete, and the next series of down waves has begun.
The pattern is basically the same on all of the Dow’s sister indexes. All appear to need a small pullback, then another rally before they complete. My new upside target for the SPX is near the 4,180 level. I had been using 4,100. So now, I would expect the wave ‘d’ pullback be close to 4,100 level before rallying toward 4,180 in wave ‘e’ up. A close below 3,980 will be my signal that Wave 2 up is complete. The S&P closed at 4,158 on Friday.
The Russell 2K could pullback to 1,850 before rallying toward 1,940-1,950. A close below 1,800 would show that the next wave down is starting. The RUT closed at 1,877 on Friday.
In earlier Comments, I warned about bear market rallies…how they could be sharp and painful to those who want to hold their short positions overnight. They can also last a lot longer than anyone expects. Remember, these retracement rallies are essentially wave 2s, and we all know how unpredictable and frustrating they can be. Trading a wave 2 is not a lot of fun, unless of course you have the Arrows and the new Bias indicator. Then trading them becomes fun again.
For example, if you didn’t know anything at all about the pre-holiday positive bias, or the fact that the market was recently oversold and set to rally, …if you didn’t know anything…and you entered Friday’s trading with an open mind….all you had to do was look at the Bias Indicator at the open.
If you started your day by pulling up a 5-min chart of an index ETF like IWM, or DIA, you would immediately have seen that the Bias was positive. So, you switched to the charts of UDOW and TNA. It took all of 5 seconds to do this. You then saw the two confirmed Green Arrows. Bam! You pulled the trigger on both, especially since you saw both were in the trend mode. Full positions were justified. An hour later when the first Red Arrow appeared, you had one point profit in SDOW, and 1.5 points of profit in TNA. Easy! During the rest of the day, three more Green Arrows appeared on SDOW and two more on TZA. All in all, it was a fantastic day to be trading the Arrows.
Still don’t have the Arrows and the new Bias indicator? What else can I say? Here’s the thing… the next leg down of this Bear Market is fast approaching. It will be a major decline. It’s gonna wreak havoc with the portfolios of many people. But IF you have the Arrows, you shouldn’t fear the volatility the next wave down will produce. You will look forward to it! Volatility, no matter which direction the market moves, produces trading opportunities. And when you have the Arrows, those opportunities translate into profits. Huge profits! So, ask yourself…why don’t I have the Arrows and new Bias Indicator? Then once you’re done thinking about what you’re missing, send Dave an email and tell him you want the Arrows. The time for watching and wondering what happened has passed. It’s now time to make things happen! Get the Arrows before the next leg down of the bear begins.
The Dean’s List and The Tide turned positive after Friday’s session. This is something that happens during a retracement rally in a Bear Market. It doesn’t change anything in the overall technical picture.
The Market Timing Indicators on the Dow turned positive. The Scalp Trading Indicators on the Dow, S&P (SPY), NASDAQ (QQQ) and RUT are also positive. One thing students should note now: The Bias indicator on the daily charts of all four indexes is still negative. This is one of the ways you can tell that the current rally is likely a retracement rally.
The Sector Ratio strengthened to 12-12 neutral after Friday’s session. The top five strong sectors are Telecoms (12), Energy (7), Utilities (5), Real Estate (4) and Cap Goods (3). The top five weak sectors are Retail (-3, Media (-3), Food Drug (-2), Autos (-2) and Service (-1). Avoid these weak sectors as they will likely lead the market lower during wave 3 of Wave 3 down.
I still don’t see any reason to be buying Bonds, crypto, or gold.
Best Bets: Once the current wave ‘c’ rally within Wave 2 up completes, I’ll be looking to trade a few inverse index ETFs during a potential wave ‘d’ down. The key word here is ‘few’. I really want to see the retracement complete five waves to the upside before I get serious with inverse index ETFs. My main aim for next week is to position myself for the next major decline I see coming.
I’m still thinking that Wave 3 down will decline to the 28,500 to 26,500 level. The current retracement rally has only strengthened my view of the overall Bearish patterns. Rallies like the one we had this past week are supposed to happen in a Bear Market.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for
05-31-2022
DMI (DIA) | POS |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | NEU | 24 May 2022 |
NASDAQ | NEU | 27 May 2022 |
GOLD | NEU | 19 May 2022 |
U.S. DOLLAR | NEU | 19 May 2022 |
BONDS | NEU | 19 May 2022 |
CRUDE OIL | POS | 12 May 2022 |
CRYPTO | NEG | 21 Apr 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.
Category: Professor's Comments, Weekend Strategy Review