Weekend Strategy Review October 2, 2022
Posted by OMS at October 2nd, 2022
In Thursday’s Comments, I talked about the possibility of the markets completing sub-waves 1 down and 2 up. I said that once sub-wave 2 up completes, sub-wave 3 down should begin. That’s what happened yesterday. I said it would be a money wave. It was. For me, it was the second triple cigar day in the past three days. There should be a few more in the day’s ahead but trading won’t be as easy as the Dow starts to approach the 28,300 level.
Yesterday’s decline saw the Dow fall exactly 500 points, to close at 28,725. The NASDAQ and S&P fell 162 and 55 points, respectively. Volume on the NYSE was 15.8 billion shares which is heavier than normal, but nowhere near what I would expect at a major turning point. There were only 4 new highs compared to 485 new lows. In other words, the decline was pretty typical for what one might expect in a Wave 3 down.
I’m still using the 28,300 level as my near-term target. The actual target is the gap at 28,323 from the close on 2 November. So, at 28,725, we’re still about 400+ points from my short-term target. But that doesn’t mean we can get comfortable here. Getting this last few hundred points comes with increased risk and could make for a few anxious moments.
I want to talk about this today as I develop my strategy for the next week or so. BTW, I’m thinking as I write this, developing my thoughts, so when you read this, just remember, its coming right from the top of my head so to speak.
Let’s take first things first. So, when I think about the gap at the 28,300 level, I MUST first think about how we got to where we are now at 28,750. The first thing that occurred was back on 16 August, when the Dow completed Major Wave 2 up (34,282 high) and started Major Wave 3 down. Minor wave 1 down of Wave 3 down completes on 6 September at the 31,038 level. From this low, the Dow bounced for 4 days into the 12 September Wave 2 high at the 32,504 level. This is where Wave 3 of Major Wave 3 down started. If you recall, this is the place I started talking about increasing my short bets and using options. BTW, for options traders, a large decline followed by a bounce is ALWAYS a place where you should consider using options. Actually, this is the ONLY place where I use options. This is why I developed my Hockey Stick w/ Blade approach. It enables me to predict a target for the trade. But I don’t want to mislead you on this. I don’t keep my options (in this case Puts) for the entire trade all the way down to the target. NO, that would be a mistake. I usually sell my option when I get a profit between 30 to 50 percent, and I sell them when the impulse wave is occurring, not after.
That’s why I was selling my Puts late Friday afternoon when the Dow was down about 425+ points. That’s when you get the most bang for your buck…selling them when most investors are panicking. This is what was happening late Friday afternoon. So, I buy my Put options only when I believe the market is setting up for an impulse wave decline. In other words, I only buy options after I see a wave 1 down and retracement wave 2 up develop (my classic Hockey Stick Pattern), and then sell them while the impulse wave is occurring. Not after. If you wait until all five waves of the decline complete, you will lose likely give back a good portion of your gain.
So, after seeing the Dow decline to 28,958 on Tuesday and rally for 549 points on Wednesday, I started to buy a few Puts. I chose the 18 November DIA Puts with a 260 strike so I wouldn’t have to pay a large premium for time. Remember this was only going to be a bet on a quick drop. Students should note where I did this, the Dow was in the middle of a Wave 3 of a Major Wave 3 down. This is where the odds for success are the greatest, especially after a small Hockey Stick Pattern developed. Anyhow, the reason I’m spending so much time on options this morning is so the next time similar conditions develop, probably in the weeks ahead, you might consider giving them a go. The thing I want to emphasize here is that conditions MUST be PERFECT for me to buy an option. PERFECT. If they’re not, I avoid them like the plague. You should too! Just remember that over 85 percent of the people who buy options lose money. That’s because they buy/trade them when conditions are less than PERFECT! So, for the most part, stick to the inverse index ETFs on the Dean’s List.
Anyhow, let’s get back to what might happen next week. I’m still thinking that something important might happen into 6-7 October. It could be that wave 3 down bottoms during that time period and we get a wave 4 bounce. It’s really hard to tell at this point, because IF the Dow breaks below 28,300, the next gap is at 27,850 from the 4 November 2020 close. After that, there’s a gap from the close on 30 October 2020 near 26,500. I believe ALL these gaps will be filled as the Bear Market progresses lower. However, how the market gets to these levels will be a bit more difficult to analyze and trade. Another realistic target for the Dow is 25,370, which is a 0.62 Fibonacci retracement of the final Wave 5 rally from March 2020 to January 2022. This target MUST be considered now that the Dow has fallen below its June 17 wave 1of 3 low of 29,653. If you recall, I previously gave the 24,000 to 25,000 level a 20-25 percent chance of being hit on this decline. Now that level MUST be raised to at least 50-50. I’m also increasing the odds of what I previously called my ‘far-fetched’ target of the 20,000 level to 20-25 percent. In other words, it’s no longer ‘far-fetched. It’s now a real possibility.
For next week, trade with caution as the Dow approaches the 28,300 level. The A-D Oscillator is oversold at -207, but not terribly oversold given the Wave 3. The 2-period RSI is oversold at 14.57, but it is showing positive divergence. So, it’s possible that that Dow bounces early next week for sub-wave 4 up and then declines later in the week as sub-wave 5 down completes wave 3 down into 6-7 October.
As of Friday, I took profits on all my option trades and lightened up on most of my short (inverse) positions. If the Dow bounces early next week, I’ll look to buy a few shares of SDOW, TZA, SQQQ, and SPXU, but not as many shares as I was holding with the Dow above 29,000. I’m also out of SARK for the time being. I’ll look to re-enter the trade from higher levels.
I still believe that Major Wave 3 down is not even close to being over. However, we could see a significant sub-wave 4 retracement rally develop from levels near 28,300+/-. That’s what you need to protect against, so pay attention to any change in arrows on the 60 min charts from levels near 28,300.
The Dean’s List and The Tide are still negative.
The Market Timing Indicators on all the major indexes are still negative.
No change in the Sector Ratio. It’s still at 0-24 negative after Friday’s session. There were no strong sectors. The top five weak sectors are Consumer Products (-8), Media (-7), Semiconductors (-6), Material (-6) and Transportation (-5).
I’m still watching Bonds, Gold, Silver, and the inverse Dollar (UDN) for signals. All have positive charts once the current declines complete. Keep an eye on gold (the metal). The Market Timing Signal for gold turned neutral on Friday. Wait for the signals to change. BTW, at this point, no matter what gold does in the days ahead, I can only consider it as a short-term trade only. Gold needs to do a lot of work before it goes into a longer-term trend. Could be that the bounce I see coming is only a short them retracement rally.
I’m still not interested in anything crypto.
Continue to focus on inverse index ETFs from the Dean’s List, especially after a bounce.
Have a great weekend. Now that the weather is clearing here in Florida, I think I’m going to go outside and pick a few of the palm fronds that were blown down during the cane. Great time for me to smoke one or two of the cigars I earned during the week :>)
That’s what I’m doing,
h
P.S. I’m thinking that it might be a good time to get together again for another GoToMeerting Session. This one could be a combo Update-Class About Nothing, mostly because I know many of you probably have a lot of questions about where the Bear will wander from here. I’ll talk to Dave about his plans for next week. Could be fun.
Also, if you see some old geezer wondering around the neighborhood smoking a really nice stogie, please don’t bother him. He’s thinking…..
Market Signals for
10-03-2022
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
Index | Signal | Signal Date |
---|---|---|
DOW | NEG | 15 Sep 2022 |
NASDAQ | NEG | 15 Sep 2022 |
GOLD | NEU | 30 Sep 2022 |
U.S. DOLLAR | POS | 23 Aug 2022 |
BONDS | NEG | 11 Aug 2022 |
CRUDE OIL | NEG | 15 Sep 2022 |
CRYPTO | NEG | 15 Sep 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