Bullish or Bearish? Week of September 5, 2022

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Short-term trend (DAILY CHART) – SELLOFF. It was another dreadful week for the indexes, the third in a row. SPX fell from 4057 to 3924, a painful 133-point drop while breaking SPX 4,000. The previous month’s rally can be characterized as a “bear market rally,” which means we are still in a bear market (to be precise, SPX is 18 percent lower from its 52-week high). SPX is below all three moving averages on the daily chart, an ominous sign. Note: Futures are flat on Monday night, but that could change in the morning.

Long-term trend (WEEKLY CHART) – LOWER. SPX is well below its 50- and 100-week moving averages but still above its 200-week moving average.

MACD (WEEKLY) = MIXED. The WEEKLY MACD is above the 9-day signal line but turning lower. It remains well below the zero line, a negative reading.

RSI: (S&P 500) @35.23 (DAILY) OVERSOLD. RSI is telling us the market is oversold and is due for a snapback rally. Unfortunately, RSI cannot be used to time the market but RSI 35 is a strong clue the selling has reached strong oversold levels.

Daily Intraday Volatility (VIX) = 25.47 ELEVATED: The VIX remains elevated but not at extreme levels. The falling market has gotten the attention of option traders, who are slowly accumulating more put options.

Comment: The three-week selloff is a clue that we are still in a bear market, which means the previous rally last month was a “bear market rally.” The Fed made it clear it will be tightening in the near future (i.e., QT, or quantitive tightening). Inflation still remains, which affects company profits and consumer spending habits.

Even though a short-term rally is likely in the near term, 2022 is almost guaranteed to be a challenging year. Of course miracles do happen, but based on the odds (and previous bear markets), plan for a bear market environment.

Unfortunately, many investors, traders, and money managers have never experienced a bear market. That should cause volatile market environments as panicked traders, even many pros, make emotional trading decisions.

Bear markets are difficult to manage, one of the reasons I’ve stressed trading with less money or not at all. Continue dollar cost averaging if you own index funds. Some readers have written me to say they’ve done well selling covered calls (and taking their profits quickly).

Bottom line: Prepare for and expect a rocky, volatile trading environment. Based on RSI, a rally is likely, and if this is a true bear market, that rally will fail. This is a good time to study and learn while preparing to buy favorite stocks at much lower prices. This is a four-day week, which are historically tricky.

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