Weekend Strategy Review October 23, 2022

Posted by OMS  at October 23rd, 2022

Stocks staged a strong rally yesterday on heavy volume but weak breadth. The Dow rose 747 points, closing at 31,082.  The Dow reached an intraday high of 31,119, which was just short of its 50-day moving average on 31,112. The NASDAQ and S&P were up 245 and 87 points, respectively.

It’s possible that yesterday’s rally was the completion of wave ‘c’ of retracement wave 2 up.  However, if it is, it will be unusual as even with yesterday’s strong rally, the Dow still has not made a .38 percent Fibonacci retracement of the decline from 16 August into the 13 October. Also, even though yesterday’s rally on the Dow was strong, it was less so on the Russell, S&P, and NASDAQ which have still not moved above the 18 October high. Another thing I found unusual about yesterday’s rally on the Dow was that even though it moved above the 18 October high, the VZO came in with a reading that was less than its reading on 18 October, which is a clear divergence in volume. So, like I said, its possible that yesterday’s rally was the end of retracement wave 2 up. We’ll just have to see. I always say the wave 2s have a mind of their own.  It will be over when it’s over.

Students should continue to watch the 13 October lows. Once these important lows are broken, the odds will increase that wave 3 down is underway. The October lows form the right shoulder of ‘neckline’ support for the larger H&S Pattern discussed previously. Right now, this pattern is the elephant in the room.  However, before the 13 October lows are tested, it’s still possible that the Dow could rally to fill the gap made on 12 September near the 32.000 – 32,300 level. This would also be a .68 retracement of wave 1 down.  Because of yesterday’s weak breadth, I do not believe a retracement to these levels is likely, but I MUST mention it because it is possible.

The Dean’s List has turned positive, but the Tide is neutral.  A negative and diverging Hi-Low indicator is keeping The Tide neutral.  My custom VTI indicator is still showing no trend which continues to support the scenario that the current retracement is part of a wave 2 up.

The Market Timing Indicators for the Dow is still neutral.  The same timing indicators for the NASDAQ remain negative.

The Sector Ratio weakened to 1-23 negative after Friday’s session. The only strong sector was Energy (5).6 The top five weak sectors were Semiconductors (-9), Telecoms (-6), Retail (-6), Consumer Products (-5), and Household Products (-5).

During yesterday’s session I received an email from a relatively old student who had just purchased the Arrows Class. He was about to place his first trade using the Arrows and wanted to know if I had any suggestions that could help. Hmm?  I didn’t respond to his email because (1) it was in the middle of the trading day, and (2) I don’t give advice to individuals on trades.  I simply can’t do this, and I don’t.  

But if there was ever a day when trading was SIMPLE, it was yesterday.  Right after the open, the Bias turned POSITIVE. I don’t care which short-time periods you looked at, 4, 5, 10, 15, 30, 60, and 4 hour bars…the Bias was POSITIVE.  So, there was no way you could have been even thinking about a trade to the short side.  You had to be looking for longs yesterday.  If you wanted to scalp trade the Dow on the 4 min bars, there were seven opportunities to get long. SEVEN!  Six of these trades were nice winners with one, (at the 2:30 mark) being a break even. If you traded the Russell on the 4s using TNA, there were six confirmed Green Arrow trades with 5 nice winners and one break even.  All you had to do was check the Bias, enter on the Green Arrows and exit on the Reds.  Simple!  I have made trading EXTREMELY simple.  So, please don’t send me emails during the day asking me for advice on a trade.  You know what you should be doing. It’s the same thing I’m doing. Watching the Bias and trading the arrows. That’s all I ever do.  I just keep doing it over and over and over….

And that’s my strategy for next week.  If I decide to trade on Monday when the market opens, the first thing I’ll do is check the Bias. It’s the first thing I do every day.  If the Bias is positive on IWM, my reference ETF for the Russell, I’ll look to buy TNA.  If the Bias is negative, I’ll look to buy TZA. Once I’m in, I’ll look for a Red Arrow to exit the trade. That’s it. Simple.  Do not over think or over complicate your trades. Keep them simple.  Then once you have completed several of these trades, you can send me an email and tell me how great you did.  I love to get these kinds of emails. I read and respond to them quickly every day.  I just don’t do emails from students who want me to hold their hand. That’s not why I do this. In my Classes, videos, and comments, I try to teach you how to trade…. sort of like what the Big Guy said about teaching people how to fish.  I have given you everything you need to place winning trades. Now its your turn. You have the knowledge.  Now, if you’re a new trader, it’s time for you to go fishing by yourself.  

It’s also time for my new traders to show discipline.  What do I mean by this?  Hmm?  Well, I also received an email from a new trader who lost money because she didn’t follow the rules.  There are still way too many students who place trades without checking the Bias.  Let me tell you a secret.  If you continually trade against the Bias, you will lose money.  I don’t care how great the Arrows are…if the Bias is not with you when you place a trade, the odds are not favorable.  If you look at the Bias on Friday’s 4-min chart of TNA, the best time to place the trade was not only when the Bias was positive, but when it was rising.  There were four opportunities to trade with a rising Bias on Friday. All were nice winners. A Green Arrow with a rising, positive Bias almost always leads to a nice winning trade.  This is not to say that a Green Arrow trade placed with positive but flat or falling Bias won’t be a winner.  Most of them are.  But many times, if the Bias is positive, but falling, the trade usually results in a small gain or a break even.  So, IF you want to have really nice winning trades, just be patient and only take trade when the Bias is positive and RISING. This is what I mean about having discipline. 

So once again, come Monday…. once the market opens: (1) check the Bias.  That will tell you the direction to trade.  Then (2), look for confirmed Green Arrows.  If you want to increase your odds for a Big Winner, (3) look Green Arrow trades with a RISING BIAS.  Lastly, (4):  above all, do not send me an email asking for advice.  I’ll just ignore it. You know what to do.  Now’s the time to just go do it.

Bottom Line:  Continue to watch how retracement wave 2 up unfolds. Just remember, wave 2s are EXTREMELY difficult to trade.  If you trade them, use the short-term bars and exit your positions by the end of the day. 

That’s what I’m doing,

h

Market Signals for

10-24-2022

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.