Bullish or Bearish? Week of October 10, 2022

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Short-term trend (DAILY CHART) – FAILED RALLY:  As expected, last week was WILD. First. the market rallied by 6 percent in two days. Then it sold off (more on this in the comment section). SPX ended the week with a mild 54-point rally, rising from 3585 to 3639. Because the rally ultimately failed, the daily chart is still dreadful. Futures are lower on Sunday night, but that could change in the morning.

Long-term trend (WEEKLY CHART) – DOWNTREND. SPX spiked above its 200-week moving average early in the week, but then sold off later in the week. It is now slightly above its 200-week moving average. As mentioned last week, if SPX drops below its 200-week MA (a support level), it will not be pretty.

MACD (WEEKLY) = DOWNTREND. The WEEKLY MACD continues to fall, as MACD dropped below both the 9-day signal line and zero line. 

RSI: (S&P 500) @37.73 (DAILY) OVERSOLD. RSI flashed a buy signal when it dropped well below 30 last week. As if on cue, the indexes rallies strongly, bringing RSI back to even. After last Friday’s selloff, however, RSI is slightly oversold again. If it drops to 30 or below, it could be a short-term buying opportunity.

Daily Intraday Volatility (VIX) = 31.36 ELEVATED: All of this volatility is playing havoc with VIX. It plunged early in the week, then rose later in the week as nervous option traders added more puts to their option positions.

Comment:  Last week, I asked: “How long will the rally last?” As it turned out, two days. Once again, RSI was so oversold (well below 30) that a monster rally was inevitable, and SPX did not disappoint. As mentioned earlier, SPX rose by 6 percent in two days, a spectacular achievement. Then, the indexes sold off (financial experts are blaming it on a strong employment report, which in the wacky world of Wall Street, is a negative).

It’s so obvious we are in a bear market. Every strong rally, even a monster rally, runs out of steam. This is how it’s going to be for a while, maybe for months: Rallies followed by selloffs.

Even more dangerous, one day we may have a sustained rally that brings the indexes back above its moving averages. Just when everyone proclaims the bear market is over, the indexes plunge even harder. This is a real possibility.

Since every bear market is different, it’s wise to read about them so you know what to expert (I have a MarketWatch column coming out next week that describes the 9 stages of a bear market. Unfortunately, we are only in the 4th stage.)

If you want to know what to do, although I can’t give specific advice, I can say that the following are good ideas:

  1. Dollar cost average into index funds if a long-term investor.
  2. Buy CDs and T-bills, which are paying near 4 percent, but check to confirm the rate.
  3. Raise cash for protection, but also be ready to buy when the bear market ends (although it’s nearly impossible to time the bottom).

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