Weekend Strategy Review November 6, 2022

Posted by OMS  at November 6th, 2022

Stocks chopped around and finished higher yesterday after a better-than-expected Jobs Report.  I won’t go into the numbers today because with the mid-term elections scheduled for next Tuesday, the normal fudge factors used by the BLS were most likely exaggerated, making the jobs number totally useless.  If you think about it, for the past few weeks, all you’ve heard form the media is how companies are laying off workers.  Then yesterday, the government tells you that the number of new jobs created last month increased.  Really?

Doesn’t matter.  The market took the news as a positive and moved higher.  Heck, it was supposed to. After two days of decline for 654 points, the Dow needed a bounce.  The bounce was a 50 percent a-b-c retracement of sub-wave 1 down.  Taken together, the price action from Wednesday’s high were the set-up waves (sub-waves 1 up and 2 down) for sub-wave 3 of wave 3 of Wave 3 down, which should start early next week.  The same pattern is present on the broader S&P with the only difference being that the high on that index occurred last Tuesday.  This is a key date for the S&P because any rally beyond 3911 (the 1 November high) means that wave 2 up is still not complete and is developing into a more complex pattern.

The key dates to watch on the Dow now are the 21 October low of 30,206 and the 13 October low of 28,660.  Right now, most investors are feeling somewhat confident after the market had a good October retracing a good portion of the decline from mid-August into late September.  But once the 13 October low is broken, they will once again start worrying about their portfolios.  I see this happening right here in Jax Golf.  I have several friends who live to play golf two or three times a week.  They ask me about the market when it’s going down and I tell them to be careful…that we’re in a Bear Market. But as soon as the market stages a retracement rally, like the one that occurred last month, they are quick to let me know how wrong I was …that this market is going much higher. Of course, none of them understand that the market moves in waves, and that it’s perfectly normal to have large retracement rallies in a Bear Market.  No market ever goes straight down.  On the other hand, if I’m right about the pattern I discussed above, the next few weeks could get really ugly.

The NASDAQ-100 is particularly vulnerable.  It has a major Head & Shoulders pattern on its daily chart that goes back to October 2020.  As of Friday, prices are sitting right on the neckline of this pattern, near the 10,850 level.  The Head of the pattern is the 22 November 2021 high of 16,764.  So, IF you subtract 10,850 from 16,764, you get 5,914 points.  Subtracting this number from the neckline at 10,850 produces a target near 4,936.  Hmmm?  Can’t happen you say?  Well, let me say this.  If the NDX starts to break 10,850 in the days ahead, you won’t see me long tech stocks. Most of the big-name techies and FAANGS have been hit hard for the past year.  A stock like Netflix, has been cut in half.  If the H&S pattern I’m seeing plays out, NFIX could get cut in half again. I wonder what my golfing neighbors are gonna say then?

Same for the Russell. It appears that preliminary down waves of the small cap index are already underway. If the index stays below its 1 November high of 1,869, the next major move should be a test of the 13 October low of 1,642. If this low is broken, Katie bar the door! The 13 October low is where the right shoulder and ‘neckline’ of the RUT’s H&S Pattern. The Doctor’s Trade with TZA is still on a Green Arrow.

The Dean’s List is neutral. The Tide are still positive.  BTW, the reason the Dean is neutral is because of the NASDAQ.  QID is on the List.  Cathy Wood’s ARKK Innovative New Technology Fund is on a Red Arrow with a negative Bias indicator that is heading down.  The fund was at 159.7 twenty months ago.  Now it’s at 35+. Is the ETF about to get pounded even more?  Hmmm?  That’s what the chart says. 

BTW, let me say something about Cathy’s Fund.  Even though the Fund rose mostly because of Cathy’s investment in Covid stocks and NOT because of “New Technology”, I still believe in the Funds concept. At some point in this Bear Market, you will see me begin to invest a good portion of my money in Cathy’s Fund.  I’m a big believer in new technology. It’s just that the timing for it is wrong now.  Like any Fund, Cathy had to keep a good part of her money fully invested in stocks.  She had no choice because that’s what her documents said she would do.  So, when the market started to pull back, and investors wanted to take money off the table, she had to sell stocks to raise cash.  That was not only a problem for Cathy, but it was also a problem for most Mutual Fund managers. That’s why Mutual Funds that can only invest in stocks are not a good thing to own in a Bear Market.  But Bear Markets, while painful, do not last forever.  And a time will come when Funds, like Cathy’s, will become attractive again. That time might be when Major Wave 3 down ends and Major Wave 4 up begins.  It might be several months from now and several thousand Dow points lower. But the time will come.  All I’ll be doing is watching for Green Arrows.  Like I said, I like technology, just not now.  

The Market Timing Indicators for the Dow are positive.  The same timing indicators on the NASDAQ are negative.

The Sector Ratio weakened to 10-14 negative after Friday’s session. The top five strong sectors were CapGoods (8), Energy (5), PharmaBio (2), Autos (1) and Foods (1).   The top five weak sectors were Retail (-4), Consumer Products (-4), Household Products (-3), Healthcare (-3) and Computers (-3).

My Trades:   With stocks retracing early yesterday, I didn’t do much until late morning.  The Bias on TZA, the ETF I was looking to trade, stayed negative until 11:30.  I jumped in with a few shares near the 11:06 mark, when the Bias started to rise and the Trend Indicator showing trend.  But I must admit, I was cautious yesterday given the positive Jobs report and the upcoming elections.  Also, the market had a funny feeling to it all day, typical of what happens on days when its retracing.  You can see what I felt by looking at the falling Bias indicator after the first Red Arrow.  Green Arrow trades taken on a falling Bias usually never amount to much, and that’s what happened yesterday.  So, at 2pm, I closed shop and watched another episode of Billions.

For next week:  All I’m doing now is looking for opportunities to position myself for the next major decline.  I plan to be cautious on Monday and early Tuesday but want to have something short on by late Tuesday afternoon. Then depending on what happens after the elections, I’ll start trading aggressively once the results are in. With the charts suggesting that three waves of downside are about to start, I just want to see some impulsive action to the downside. If it starts, the Arrows will help me take advantage of it.

Have a great weekend. Get some rest. I have a feeling that the next few weeks are going to be EXTREMELY volatile.

That’s what I’m doing,

h 

Market Signals for

11-07-2022

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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.