Bullish or Bearish? Week of Oct. 15, 2018

Here are the latest market indicators:

S&P 500 one-month trend = Pivot Point  (The uptrend has been temporarily broken. Caution is advised.)

S&P 500 is below its 50-day and 100-day moving averages = Bearish

RSI: (S&P 500) @29.52 = Oversold (rally is possible)

Intraday Volatility: Moderate to Heavy (anything is possible if volatility increases) 

Comment:  Last week I saw some important clues that pointed to a trend change. For example, I correctly identified what is called a “pivot point,” which I said could be a “potential trend change.” Little did I know that it would be that severe. In fact, the Wednesday afternoon plunge took nearly everyone by surprise, including me. (FYI, “pivot point” was coined by Jesse Livermore, and is worth studying). 

There were many clues that we were hitting a short-term top. For example, investors had been bragging how much money they have made in the market. (That’s how I predicted the bitcoin top almost to the day). I was also getting emails and text messages from investor friends bragging how the market “will never go down” or if it does, “it will bounce back quickly, because the market always comes back.” 

The S&P sliced through the 50- and 100-day like it was butter. Right now, it’s a point above its 200-day moving average. If SPX drops below and stays below its 200-day moving average, that would be extremely bearish. In the past, however, the market recovered from these pullbacks and went on to even higher levels. It remains to be seen if it can do that again. Unfortunately for the bulls, interest rates are rising, and that is a huge negative for the stock market. There are other issues as well, but interest rates take center stage for now. 

Moving forward, we need to see if the indexes recover from last week’s short-term disaster. At a minimum, the S&P 500 needs to retake its 100-day and 50-day moving averages, just like it did in February and July. Investors are hoping for the best, while objective market observers know the market could go in either direction. It is still too early to proclaim that the worst is over, even after Friday’s snapback rally. 

Bottom line: If the indexes fail to rise above its moving averages, or if they continue to fall, that would be a huge warning sign. The coming weeks are important as the indexes try to repair the damage from last week.

Note: Here is my latest column on MarketWatch, about how to get started trading options: https://on.mktw.net/2Nx6inI

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

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

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

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