Bullish or Bearish? Week of May 23, 2022

MY TWO NEW BOOKS WILL BE RELEASED IN TWO DAYS: My two newest stock market books will be released on Tuesday. Here is the link to Understanding Stocks (3rd edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — I discuss how to manage corrections and bear markets — and examine the most important indicators and oscillators. 

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. The falling market has become big news in the financial media. For the eighth week in a row, SPX plunged, this time from 4023 to 3901, a painful 122-point drop. It could have been a lot worse but we had another “turn-around” Friday. On Friday, the Dow and SPX fell by 20 percent from its recent high, which triggered a technical bear market definition. It also triggered short-term buy programs, allowing both indexes to narrowly escape the bear market designation. That is little satisfaction to long-only investors, who are nursing huge losses. Futures are HIGHER on Sunday night. It is possible this rally will have legs (i.e., it may last longer than one day).

Long-term trend (WEEKLY CHART) – LOWER. On the weekly chart, SPX is still below its 50- and 100-week moving averages, but remains above its 200-week MA. The long-term outlook is not great, but there is room for a strong rally this week. (Note: Always watch the rallies for signs of strength.)

MACD (WEEKLY) = LOWER . The WEEKLY MACD is below the zero line and the 9-day signal line. It’s a lagging indicator, which reflects the damage the indexes have experienced in the past. It may take a while, but we will use MACD to help us find an eventual (and tradeable) bottom.

RSI: (S&P 500) @35.47 (DAILY) OVERSOLD.  Once again, RSI fell to near-30 (on Friday), and bounced. If there is any good news, it’s that the indexes are oversold in the short term, so a relief rally is likely this week or in the near future.

Daily Intraday Volatility (VIX) = 29.43 = ELEVATED: VIX is higher than 20 (typically a normal reading), but the higher VIX reading does not reflect extreme fear. Prognosis: The VIX is high, but it’s not at panic levels.

Comment: Because the market has sold off for so many weeks, and because there is so much doom and gloom on Wall Street, and because RSI is oversold, the odds of a strong rally is likely. Futures are higher on Sunday night but the question is: Can it carry over to Tuesday and beyond? That would be a relief to investors, the reason it’s called a “relief rally.”

We are not predicting a rally, but in past bear markets, strong rallies often lured the bulls back into the market. Then the bottom really fell out! Since every bear market is different, no one can predict how this potential bear market will develop.

Technically, the Dow and SPX are not in a bear market, but that could change in the future. One of the clues that a rally is possible is the 500-point Dow reversal on Friday. Obviously, enough institutional buyers entered the market (along with algos) to keep the market afloat. That was a positive sign (within a sea of bad news).

Eventually, investors will have to deal with a strong likelihood of a bear market (the Nasdaq is already in one by definition). It’s a good idea to have a plan of what to do if all three indexes keep plunging. For now, be prepared for any scenario, and don’t panic (easier said than done).

If we do get that rally, and if it lasts a while, many investors may consider selling some, not all, of their positions, a decision only you can make.

One thing for sure: Bear markets and corrections are difficult to manage, as millions of investors and traders have discovered the hard way.

Bullish or Bearish? Week of May 16, 2022

MY NEW BOOKS: My two newest stock market books will be released on May 24th (although books are available at most Barnes and Noble bookstores. Here is the link to Understanding Stocks (3rd edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — I discuss how to manage corrections and bear markets — and examine the most important indicators and oscillators. Sample pages are available on the above websites.  

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. SPX fell from 4123 to 4023 last week, a 100-point drop. On the daily chart, all of the indexes are below their 50-, 100-. and 200-day moving averages. It could have been even worse but Friday’s rally reduced the damage somewhat. This will be the 7th weekly selloff in a row. The only good news is that the markets are getting oversold, so a monster rally is likely in the near future.

Long-term trend (WEEKLY CHART) – LOWER. Unfortunately, SPX fell below its 50- and 100-week moving averages on the weekly chart, not a good sign for long term investors. Fortunately, all of the indexes are still above their 200-week MA, even though the Nasdaq is in a bear market. (Take a look at the Nasdaq on the daily chart to see why).

MACD (WEEKLY) = LOWER . The WEEKLY MACD remains below the zero line and the 9-day signal line. Because MACD is a lagging indicator, this is not surprising.

RSI: (S&P 500) @38.73 (DAILY) OVERSOLD.  RSI fell below 30 last week, an extremely oversold reading, and right on cue, the indexes rallied the next day. Recently, I have found RSI to be remarkably accurate with indexes when extreme readings are hit.

Daily Intraday Volatility (VIX) = 28.87 = ELEVATED: VIX is still higher than it’s “normal” reading of 20 but it’s not even close to reaching a top (at 40 or 50, when the markets appear to be crashing, many counter-trend traders go long). A VIX in the 20’s tells me that option traders are only slightly concerned but not afraid (maybe they know something we don’t!).

Comment: It’s been a rough 7 weeks for investors and crypto traders (some of the stories of losses that I heard from bitcoin traders are frightening). It’s terrible for the ego and investment account when winners turn to losers. As mentioned earlier, the Nasdaq is already in a bear market, and the odds are good that the Dow and SPX will follow it. Not guaranteed, but likely.

Because the indexes are so oversold, a monster rally is likely. That will lure many previously bullish investors back into the market, and many will believe the worst is over. This is not a prediction but based on previous bear markets, this scenario is likely. Bear markets are very tricky animals: In the middle of these awful selloffs, there are these huge “blow-your-socks-off” rallies, although they typically fail.

The Bad News: If the other indexes fall into a bear market, this event “could” last as long as a year, testing the patience and emotions of many investors and traders, especially rookies.

The Good News: As Lance Roberts said in his blog, “It’s so bearish it’s bullish,” and he’s right. Most investors have lost money, and are exceedingly bearish, which is actually a bullish sign. As I said earlier, a rally is likely.

Bottom line: These are unusually treacherous times so it’s essential to be alert to any possibility. The FAANG stocks are reflecting some of the worst losses. It would not be surprising if many other stocks followed the Nasdaq into the abyss (but not right away).

Bullish or Bearish? Week of May 9, 2022

MY NEW BOOKS: My two newest stock market books will be released on May 24th. Here is the link to Understanding Stocks (3rd edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — I discuss how to manage corrections and bear markets — and examine the most important indicators and oscillators. 

Today’s MarketWatch column: https://on.mktw.net/3vWhQdC

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. SPX retreated for the sixth week in a row, from 4131 to 4123, a mild 8-point drop. The problem is that after a monster 1000-point Dow rally, the next day the market gave up all its gains. The lack of a follow-through was very negative. The charts are awful: SPX is below all its moving averages on the daily chart. Futures are LOWER on Sunday night, but that could change in the morning.

Long-term trend (WEEKLY CHART) – LOWER. SPX is below its 50-week moving average and barely above its 100-week. From a longer-term perspective, this is not good for the bulls.

MACD (WEEKLY) = LOWER . The WEEKLY MACD is below the zero line and the 9-day signal line. Not good for the bulls. 

RSI: (S&P 500) @38.77 (DAILY) OVERSOLD.  Unfortunately, RSI is oversold but not at extreme levels yet. Investors are feeling pain, but there is room for the market to keep falling. At 30 RSI or below, SPX will be extremely oversold.

Daily Intraday Volatility (VIX) = 30.19 = ELEVATED: VIX is higher than in the old days of 20 and below, but it is not at extreme levels yet. Option traders are buying puts for protection but few are panicking yet. This tells me we have a long way to go before we hit a bottom on the indexes.

Comment: I know from my neighbors how bad it is. One of my neighbors owns the ARK fund, managed by Cathie Wood, and is getting creamed. My other neighbors own the MAANG stocks (Meta, Apple, Amazon, Netflix, and Google). Netflix caused the most financial pain, plunging from $700 per share six months ago to $180 on Friday. As I wrote in today’s MarketWatch column ( https://on.mktw.net/3vWhQdC ), that’s not a bear market, that’s a crash. 

Speaking of bear markets, the odds are good that the S&P 500 and the Dow will follow the Nasdaq into bear market territory. Based on technical analysis and historical trends, do not be surprised if the S&P 500 falls to 3200 to 3400 (this is an educated guess, not a prediction). 

Bear markets typically develop over a short (one to three months) or a long (one year or longer) time period. That means that it will likely be a painful journey lower over many months or a year. 

Many investors won’t look at their accounts or will avoid discussing the stock market. Some stocks will recover in the future (it may take a long time), while other stocks may not ever return to their old highs. No one can predict which stocks will succeed and which will fail. The only thing we know for sure is this is going to be painful emotionally and financially for many investors. 

My newest book, How to Profit in the Stock Market, discusses bear markets, corrections, and crashes. As I was writing this book, the market continued to move higher and higher into year end. Because I saw clues that the market was topping out, I was able to include a lengthy discussion on all three market events.

What were some of the clues? One TV host in particular continued to brag about how much money he and his followers had made in the market. He showed photos of his lavish lifestyle on Twitter, including an extravagant Christmas dinner. That was the top! 

Other clues: RSI was overbought, MACD had flattened, and the rallies were losing strength. Investors were exuberant, few were selling (because of a fear of missing the next rally), and no one believed a pullback would last longer than a few weeks. 

In December, I wrote a column about the predictions of the late Mark D. Cook, who warned that this overbought market was on its last legs. Cook always told me that prices are always the last to fall, and he was right. The bear market was already developing in December before most people realized it. It’s similar to a bridge that looks solid on the outside but rotting underneath.

The good news is that if you are patient, there will be fantastic opportunities to make money when the “bottom” is reached. How do you know there is a bottom? If SPX and the Dow enter bear market territory, we will use our indicators, oscillators, and clues to identify a good entry point. The goal is not to catch the exact bottom (as that is nearly impossible) but to buy at much lower prices than now. 

It was a lot more fun making money on the way up. On the way down, it will test the emotional fortitude of many investors who say they are in it for the long term. Unfortunately, as history has shown us, in the deepest depths of a bear market, many panic sell (when losses are at 50 percent or more), just when the market hits bottom. 

No matter what happens in the future, this is guaranteed to be an educational experience for many. 

Bullish or Bearish? Week of May 2, 2022

MY TWO NEW BOOKS: My two newest stock market books will be released on May 24th. Here is the link to Understanding Stocks (3rd edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — I discuss how to manage corrections and bear markets — and examine the most important indicators and oscillators. 

Until my limited supplies last, I am offering a signed copy of my book for $24 (list price) plus $3 shipping (in the U.S.). Email me if you want a copy of one or both books. 

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. SPX retreated for the fifth week in a row, from 4271 to 4131, an excruciating 140-point pullback. Once again, the Dow fell by nearly 1000 points on Friday (this was the second 1000-point Friday selloff in a row). The SPX daily chart is horrendous as SPX is below all three moving averages. Futures are SLIGHTLY HIGHER on Monday morning.

Long-term trend (WEEKLY CHART) – LOWER. SPX has fallen below its 50-week MA on the longer-term weekly chart (a red flag), and is now threatening to drop below its 100-week average. From a technical side, it’s not looking good (if long).

MACD (WEEKLY) = LOWER . The WEEKLY MACD has fallen below the zero line and the 9-day signal line. Not good for the bulls. 

RSI: (S&P 500) @34.98 (DAILY) OVERSOLD.  If there is any bit of good news, it’s with RSI, which is oversold and close to extreme oversold conditions (below 30). If we drop below 30 on the daily RSI, expect a monster snapback rally in the near future.

Daily Intraday Volatility (VIX) = 33.40 = HIGHER: We went from “What me, worry?” to “The Sky is Falling” in a month. The VIX is reflecting the fear and anxiety option traders are feeling as they gobble up puts to protect long positions.

Comment: It was another awful week for the major indexes as well as individual stocks. Netflix continues to fall after a mind-boggling 36 percent gap-down selloff, and the great company, Amazon, took a 15 percent beating last week. Even Apple took a hit. The charts on all of the FAANG stocks are dreadful — all below their moving averages on the daily chart.

Many investors are not used to this kind of price action as most selloffs in the past have rebounded fairly quickly. Perhaps that is why so many people are holding on for dear life (HODL), and refuse to sell. That strategy makes sense if you a very long-term investor, if you know what you own, and you are diversified.

On the other hand, if you can’t take the pain (it could last several months to a year), or you are holding a losing stock, you will be in for a rough time in the short term.

This is the time to evaluate what you own, determine how much risk you are willing to take, decide on whether you are a long-term investor or a short-term trader. If you are a long-term investor and you own a solid stock, then buy and hold should work. However, as I write in my books above, a better strategy is Buy and Hold Until Something Changes.

The person who actually helped create that strategy is Lance Roberts from realinvestmentadvice.com. FYI: Here is a link to his latest commentary, which is another excellent read: https://bit.ly/3LElu1c

Lance had warned investors months ago that the market was getting more dangerous, and he was right. In the blog commentary (above), he warns that a recession is likely.

A bear market has not officially been declared, and even if it was, not many want to talk about it. The best advice is the same advice I have given in the past including diversifying into cash (not in a lump-sum panic but scaling in), and dollar cost averaging into stock or index funds.

If we do enter a bear market and/or a recession, there will be many opportunities to buy some of your favorite stocks at much, much lower prices. Unfortunately, no one can time the bottom but we can get clues from watching the indicators and oscillators.

Right now, as long as SPX and the other indexes are below their moving averages, going long in the short-term is fraught with danger. However, the market is so oversold, a massive rally is likely. This is important: During a bear market, strong rallies are common. Typically, they don’t last longer than a day.

Bottom line: The market is entering dangerous waters. This is not the time to run and hide but to evaluate what you own. It’s been 13 years since we had a market this dangerous, so be prepared emotionally for a rocky market environment.