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WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK
Short-term trend (DAILY CHART) – RALLY. SPX skyrocketed from 3674 to 3911 last week, a phenomenal 237-point mind-blowing rally. If you had read this blog last week, you were prepared for this rally (and it could very well continue this week). Unfortunately, the market is still damaged. Even with the rally, the indexes are well below their moving averages on the daily chart. Note: Futures are lower on Sunday night (but that could change in the morning).
Long-term trend (WEEKLY CHART) – DAMAGED. The indexes are damaged on the long-term chart. Although not below its 200-day (that would be a disaster), SPX is below its 50- and 100-WEEK. Yes, there was a ray of hope last week but we are far away from the end of this bear market.
MACD (WEEKLY) = LOWER . The WEEKLY MACD is a lagging indicator, so it is reflecting the extremely negative market environment.
RSI: (S&P 500) @48.66 (DAILY) NEUTRAL. RSI was the hero last week. It told us that the indexes were ridiculously oversold in the short-term, and it was right. It went from below 30 early in the week to a neutral 48.66. Now all bets are off. We must wait for extreme conditions (in either direction) and then trade in the OPPOSITE direction. (That’s one way to survive a bear market.)
Daily Intraday Volatility (VIX) = 27.23= ELEVATED: The VIX was also a hero last week. While investors and many money managers panicked, the VIX told us that professional option traders were not very worried, as reflected in an elevated but relatively tame VIX. Yes, some option traders are buying puts for protection, but not at extreme levels.
Comment: Sometimes you have to hold your nose and do what doesn’t feel right. Going long early last week seemed to be the wrong thing to do, but it certainly wasn’t. Fortunately, we had the indicators (RSI and VIX in particular) to guide us, and they did, especially RSI, which warned us that SPX was ridiculously oversold and due for a bounce. And bounce it did!
Most investors, who follow their instincts and guts, were certain the indexes were in a “death spiral.” Last week, hundreds of bearish articles and columns appeared. Instead, we had one of the strongest rallies in months, if not longer. One reason that trading (and investing) is so challenging is that it is not logical. Remember that: The market is not logical!
Sometimes you can make the most money doing the opposite of everyone else, even though it may feel “wrong.” Once again, that is why we rely on indicators and oscillators rather than our instincts, thoughts, or feelings.
This week is a big unknown. RSI is back to neutral, and VIX is not giving us any clues. The market is still damaged and needs time to mend. I could make a case for both the bulls and the bears, which leaves us unsure which way the market will go. It could go in either direction.
Bottom line: It’s a good time to wait and watch to see if the rally has legs, or if sellers will take advantage of the short-term rally.