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 Market: https://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.