Weekend Strategy Review September 18, 2022

Friday was an expiration date for standard equity options, equity index options and ETF options.  The first two sessions after the September expiration do not have a particularly strong record for seeing gains, as the historical data shows the market was down more than twice as many times as it was up. The thing that caught my eye was that the average loss in the two days post expiration was more than 4 times the average gain.  So, with the Dow now having completed the first two sub-waves of Wave 3 down, the first two days of next week could kick sub-wave 3 of Wave 3 down. If this happens, the Dow should test the 17 June Wave 1 low of 29,653.

If you look at an hourly chart of the Dow, you can see how the first two waves of Wave 3 down developed.  From the 16 August high of 34,281, the Dow fell in five distinct waves into the 6 September low of 31,048 to complete wave 1 of Wave 3 down.  From that low, the Dow rallied into the 12 September high of 32,504 to complete wave 2 of Wave 3 down.  The day after reaching its wave 2 high, the Dow fell 1,277 points in an impulsive decline to start wave 3 of Wave 3 down. If wave 3 of Wave 3 down is underway, the market’s decline should persist. Like I always say. If it looks, waddles, and quacks like a duck, the odds are high that the thing before you is a DUCK!

Friday’s intraday low of 30,550 exceeded the 6 September wave 1 low of 31,048, so from a technical perspective, the Dow is now making lower lows. The key trend line at the 31,000 level that I have been talking about for weeks, has now been broken.  This leaves the door wide open for a test of the 17 June Wave 1 low of 29,653, which is now my next target.

The alternative is that Friday’s low completes a minor five wave down sequence for sub-wave 1 down. If this is the case, the Dow could rally back to the 31,300 level before starting wave 3 down. We should know if this alternate scenario is occurring by early Monday morning. In either case, students should understand the Major Trend is now down and any rally should be viewed as a shorting opportunity.

BTW, yesterday’s decline was led by FedEx. It caused the Transportation Index to lose 5 percent for the day and 8.8 percent for the week.  That’s a huge drop for the trannies and tells me a lot about what’s happening with the U.S. economy. Forget what you hear from the Fed and the TV commentators about the possibility of a recession. It’s all B.S. What’s fact is the trannies have now plunged 24 percent from their November 2021 high. That alone tells me that the U.S. economy is in recession and conditions are getting worse. Equity markets NEVER do well when a country is entering a recession, so don’t even think about the long side of the market for now.  Now is the time to protect your assets, especially with the charts telling me that we could be facing a wave 3 of Wave 3 down next week.

The way I like to think about trading a major Wave 3 is by going back to the 1973 Belmont Stakes. Secretariat was my horse back then. He was one of a kind. He had already won the Kentucky Derby, with a record time of 1.59.40, a number I have in my head just like Joe D’s 56 game hitting streak. I don’t think that time will ever be broken. So, there I was in 1973 with $50 bucks (it was a lot back then) betting it all on Big Red to win.  He didn’t let me down. He won the Belmont and the Triple Crown by over 30 lengths.  Anyhow, what does a horse race have to do with investing?  Well, in short…everything!  The only thing jockey Ron Turcotte had to do during the race was to not fall off.  Secretariat was going to win the race.  He was the best!  And it’s the same with making money in this market. If there ever was a time when all the things I use to predict a major decline lined up, this is one of those times. I’m not saying there won’t be minor rallies along the way….in fact, there will be.  But this is NOT the time to go into your garden (your portfolio) to check the roots of your plants to see if the flowers are healthy. Hell, if you see flowers, you KNOW the roots are healthy.  Stay out of the garden!  Right now, all the indicators are negative. They’re telling you that the market and the U.S. economy is NOT healthy. You don’t have to check the roots.  Just enjoy the flowers!

I received an email from a student on Friday telling me how he got stopped out of his TZA trade on the 4-hour bars.  He was trying to trade the 4-hour bars like they were 4 minute bars.  No. The 60s are designed to be longer term trades. He was ‘checking the roots’. He had a healthy trade going, with all Green indicators. But he saw a Red Arrow appear for a flash, so he decided to use a stop to protect his profit. The stop took him out of the trade, and he had to re-enter at a higher price.  Normally, I don’t have a problem with this, especially when I believe a retracement wave is due.  It makes sense. But when I see a potential Wave 3 approaching, I tend to give the stock some leeway. Remember, Wave 3s are the money waves. They are the reason we trade. When I see a Wave 3 approaching, I ALWAYS think about Secretariat.  You should too. Because once they start, like what appears to be happening now, the only thing you don’t want to do is fall off the horse.  

If you want to scalp trade, use the 4 or 5 min bars. Take profits often and get out of the market at the end of the day.  But for some of your money, trade the 4-hour bars.  Let it ride on Secretariat. You too could win the Belmont on the next decline.

I’m still thinking that the next decline will test the 17 June low of 29,653.  Once this level is broken, the Dow should move toward 26,500 to 28,000 which continues as my target for Wave 3 down. I still give the 24,000 to 25,000 level a 20-25 percent chance if Wave 3 down extends.

The Dean’s List and the Tide are negative. If you have some time this weekend, take a quick look at how short the Dean’s List has become.  Notice how the top ETFs are all inverse index ETFs.  That should tell you something.

All the indicators for the major indexes are negative.

The Sector Ratio weakened to 7-17 negative after Friday’s session.  The top five strongest sectors are Energy (2), Real Estate (2), Autos (2), Leisure (2), and Banks (1).  The top five weak sectors are Telecoms (-4), Material (-3), Consumer Products (-3), Transportation (-3), and Computers (-3). 

Forget Bonds, Gold, Silver, and Cryptos for now.  Focus on inverse index ETFs from the Dean’s List.

Bottom Line:  Now that support at the 31,000 level has been broken, there’s a good chance that the Dow will begin to test its next key low which is the 17 June Wave 1 low of 29, 653. If it breaks below this low, just ride the horse.

That’s what I’m doing.

Have a great weekend.

h

Market Signals for

09-19-2022

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.