Bullish or Bearish? Week of October 3, 2022

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Short-term trend (DAILY CHART) – MAJOR SELLOFF. The indexes plunged again last week, with SPX dropping from 3693 to 3585, a painful 108-point pullback. The market had one good rally during the week, but reversed the next day. The daily chart is downright ugly, falling well below its 50-, 100-, and 200-day moving averages. Futures are higher in the morning, which should translate to a strong opening. The question is: how long will it last?

Long-term trend (WEEKLY CHART) – DOWNTREND. SPX is resting on its 200-week moving average, and if support doesn’t hold, it will get a lot uglier. My money is on support holding, followed by a rally (this is not a prediction, only an educated guess).

MACD (WEEKLY) = DOWNTURN. The WEEKLY MACD continues to display trouble, as MACD breached both the 9-day signal line and zero line. 

RSI: (S&P 500) @28.47 (DAILY) EXTREMELY OVERSOLD. For the second week in a row, RSI fell below 30, which reflects extreme oversold conditions. A monster rally is likely but RSI does not tell you when. Hold on to your seatbelts as this is an important week. Put another way, RSI is warning of a reversal to the upside.

Daily Intraday Volatility (VIX) = 31.62 ELEVATED: The VIX is telling us that fear has finally creeped into the marketplace, as option buyers are protecting their portfolios with puts. At 30 and above, option traders are nervous. (At 40 or above, it reflects extreme fear that results in a tradeable bottom.)

Comment: Many investors are dealing with the selloff and bear market by refusing to look at the market or their statements. That is one way of dealing with the pain (by pretending it’s not there). Another way is to use indicators and clues to identify a short-term bottom.

Based on RSI, a monster rally should occur shortly. Unfortunately, the rally will probably not last for long. As you have seen in the last few months, every rally has been followed by a selloff (this occurs when many fund managers dump stock positions to salvage gains or limit losses).

By now, I’m sure you realize this is a bear market, and they are tricky animals. Many investors believe the worst is over, especially if there is a short-term rally. Unfortunately, if this follows a traditional bear market, the indexes have much further to fall.

Hopefully, you are diversified and also looking at fixed income products such as CD’s paying 4 percent or T-bills paying 3.85 percent. These products are not perfect but they are ideal in a high-risk trading and investing environment.

Bottom line: We are in a bear market, and they are not fun. They also last a relatively long time, so keep your seatbelts fastened.

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