Bullish or Bearish? Week of January 24, 2022

WHAT THE INDICATORS ARE SAYING 

This is what the technical indicators are telling us this week: 

One-week trend = PLUNGE. The bears took over during the week, tanking the SPX from 4622 to 4397, a mind-boggling 225-point selloff. The market has had an awful January, and there is no reason to believe it’s going to be an easy year. It won’t be. Unfortunately, many investors and traders are completely unprepared for a dangerous market (after 13 bullish years, most investors have no experience with volatile selloffs). NOTE: Futures are HIGHER on Sunday night (as the buy-on-the-dippers return), but anything is possible in the morning.

Note: A lot of financial columnists are freaking out because on Friday SPX fell below its 200-day moving average on the DAILY chart. As you know, in this blog we look at the WEEKLY chart, which gives us a longer-term perspective. When SPX falls below its 200-day on the weekly one day, then it’s time to be concerned. Until then, a bounce-back rally is likely, so don’t panic.

SPX 20-day (WEEKLY) = PLUNGE. SPX fell below its 20-day moving average as if it was sliced butter. The next stop is the 50-day on the weekly. Let’s watch to see if it holds this week.

RSI: (S&P 500) @44 (WEEKLY) OVERSOLD. It’s been a long time since RSI has been this oversold (below RSI 50), but here we are. In the past, an oversold RSI didn’t last long as the Fed cut interest rates and took other actions to save the market. Their toolbox seems depleted at the moment but perhaps they can pull a rabbit out of the hat once again and save the day.

MACD (WEEKLY) = SLIGHTLY BEARISH: While the daily MACD is a disaster, the weekly MACD is still above its zero line but below its 9-day signal line. It’s a red flag on the weekly, but no reason to panic yet (according to MACD).

Daily Intraday Volatility (VIX) = 28.85 = HIGH: Not surprisingly, fear visited Wall Street last week, and the VIX spiked higher. It’s not at extreme levels yet (above 40) but option traders gobbled up put options to protect long positions. As a result, the fear index rose dramatically.

Comment: Anyone who has been reading this blog for the last few months should not be surprised by the market selloff. Although the market had seemed unstoppable, it finally succumbed to reality (i.e., inflation, higher interest rates, and COVID) and plunged, taking cryptocurrencies along for the ride lower.

On Friday, many investors panicked, and mindlessly sold, causing the indexes to sink in the afternoon. If you look at a daily stock chart, it’s downright ugly. On the DAILY CHART, SPX fell below its 200-day moving average, MACD tanked, and RSI is in the basement.

However, in this blog we get our clues from the WEEKLY CHART, which gives more significant signals and provides a broader view of the overall market environment. At the moment, SPX is still above its 50-day MA on the weekly so there is no reason to be alarmed.

Although investors are panicking and many long-only traders are feeling pain, especially in the technology sector, we are not in a bear market yet. For that to occur, there has to be even more intense selling. Based on previous selloffs, the odds are good there will be a rally (this is not a prediction, only a possibility) this week.

If that rally doesn’t appear, and the indexes keep falling below its moving averages, then it’s going to get very ugly in the short term. Be prepared for both scenarios. It’s a good time to review what you own and have a trading plan.

After a 13-year bull market, no one should be surprised the indexes are struggling. There will be many head fakes on the way lower (i.e., there will be fantastic one-day rallies that will lure many bulls back into the market). Unfortunately, no one can predict how this “end of the bull market” scenario is going to play out.

The worst case: A long, drawn-out bear market that takes a year or longer to reach a bottom. A crash would also be unwelcome. The best scenario would be a short-term 10 or 20 percent correction. Unfortunately, the market typically goes its own way, doing the opposite of what everything “thinks” will happen.

Bottom line: Be prepared for some rough times ahead. Months ago, I expected a market selloff, one of the reasons I included a lengthy section on handling bear markets, corrections, and crashes in my upcoming book, How to Profit in the Stock Market (McGraw Hill). The book comes out on May 24th.

Meanwhile, I will do my best to help guide you during this treacherous period. Fortunately, I was mentored by a bear market expert, the late Mark D. Cook, who spent months explaining to me how to survive and thrive in volatile market environments. I truly hope that his worst predictions don’t come true, but be prepared for anything, including adjusting (or switching) trading strategies.

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Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

I will notify you of my posts via twitter@michaelsincere

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