08/29/2022
Weekend Strategy Review August 28, 2022
Stocks plunged Friday after hearing bearish news on interest rates from the Fed at their annual meeting in Jackson Hole. (Why do these clowns need to meet at Jackson Hole, some of the most expensive real estate on earth. You think they could meet in the basement of a DC office building to save us taxpayers some money.) Anyhow, the delusional money managers on Wall Street, who were hoping the Fed would keep rates low, and like children who didn’t get their way, started dumping stocks like they were hazardous waste. By day’s end, the Dow was down 1,008 points, closing at 32,253. The NASDAQ and S&P were down 498 and 141 points, respectively. The decline was impulsive. Wave 3 of Wave 3 down was on.
In Thursday’s Comments, I discussed how the Dow had completed retracement Wave 2 up on 16 August and the first waves of Wave 3 down were starting. I said it looked like the Dow needed one smaller retracement to the 33,200 level +/- before wave 3 of Wave 3 down would start. So, on Friday morning, before the Fed Meeting began, the Dow reached an intraday high of 33,364 before starting to decline. I was off by a few points. But once the decline started, it quickly blew through the 32,700-32,750 level I mentioned as my first target and then closed at my next target at 32,250. (I hit this one right on the nose as the Dow closed 3 points from my target).
Anyhow, it was interesting for me to see how things developed. Hey, inflation is currently running at over 12 percent. The Fed is telling us that inflation is at 8.5 percent adjusted and 6 percent core. They’re wrong! They know its closer to 11-12 percent, but won’t admit it. If they want to get inflation back down to their 2 percent target, they only have two options. Either raise rates to at least 4-5 percent, which will kill the economy, tank the stock market and cause a hard landing recession, or they can raise rates gradually, as Wall Street had hoped, keeping the stock market on its easy money, artificial high. The later would have cause runaway inflation during the fall elections, which would be political su***de. The Fed knows that it’s the people on Main Street, not Wall Street who vote. So, they chose to raise rates another 0.75 percent. In his remarks, Powell said, “It would take ‘some time’ and require bringing ‘some pain to households and businesses’, which he called ‘the unfortunate costs of reducing inflation’. Now you know why I hate this guy! He was one of the people who caused the problem in the first place with his easy money policies. Now he’s apologizing to us for his mistakes. BTW, my take on Powell’s ‘some time’ comment is about 2-3 years as a minimum. And the ‘pain’ he mentioned is a Dow near the 27,500 to 28,000 level, with 24,000 to 25,000 a possibility. I don’t see the Fed reversing course on interest rates or ‘pivoting’ as Wall Street likes to call it, anytime soon. We have at least three more major waves to this Bear Market before it completes and Wave 3 down is just starting. The targets I mentioned above are just for Wave 3 down.
The Market Timing Indicators on the Dow remain neutral (just barely). The Timing Indicators for the S&P, NASDAQ, and Russell are negative.
The Scalp Trading Indicators on the same indexes are negative.
The Dean’s List and The Tide are negative.
The Sector Ratio weakened to 19-5 positive after Friday’s session. The top five strong sectors were Autos (5), Utilities (4), Energy (3), Leisure (2), and Cap Goods (2). The five weak sectors were Consumer Products (-1), Computers (-1) PharmaBio (-1) Semiconductors (0) and Media (0).
I restored my full position on the Doctor’s Trade of TZA yesterday just after the open, when a Green Arrow appear on the 5 min bars. A few minutes later, there were Green Arrows on all the intraday charts. Every chart from the 2-hour time period and below was showing that TZA was entering the Trend Mode. It was time to load up.
OK, so where do we go from here now that the Dow is at 32,250? Hmmm? Looking at a chart of the Dow, my next downside target is near the 31,050 level+/-. The Dow might make a small bounce sometime next week, but any bounce now should be temporary and short lived. Remember, were in the heart of a major Wave 3 decline now, so I’m not expecting much from any bounce. There is an alternative that because yesterday’s plunge was a bit more than a 0.38 percent of the wave1 rally off the 17 June low, the Dow could have completed its sub-wave 1 down. If this is the case, the Dow could rally back to the earlier wave 4 high, which was Friday’s high of 33,363. I give this extremely low odds, but it is possible. A strong decline on Monday will end this possibility.
BTW, my next target for the S&P, which as the same pattern as the Dow, is now near the 3,900 level. The S&P closed at 4,058 on Friday. My next target for the RUT is near 1,780-1,790. This is the level where the RUT traded for five days in late July. It is also close to the 200-day moving average, so it should supply strong support. The equivalent level on IWM the tracking ETF I use to make my decisions on TZA or TNA, is near the 179-180 level. IWM closed at 188.98 on Friday, so we should still have about 10-points of downside remaining in IWM before we must make a decision on TZA.
Bottom Line: It appears that Wave 3 down, the wave we have been waiting for, is now underway. All I’m doing now is holding my short positions in inverse index ETFs. I’ll be using a 3-day, 12 min chart to add to these positions on any short-term rally.
That’s what I’m doing
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