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 Market: https://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.