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.

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