The Weekly Trader

MY TWO NEWEST BOOKS WERE RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F (Amazon) or https://bit.ly/3udwAUf (Barnes and Noble). Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) SELLOFF. The indexes took a negative turn last week, especially SPX, which fell from 4067 to 3873, a disastrous 193-point rout. SPX is once again below its major moving averages, including a break below the important 4,000 support level. In two weeks, we went from hugely overbought to oversold (according to RSI). In a nutshell: it’s ugly. Futures are LOWER on Monday morning.

Long-term trend (WEEKLY CHART) – DOWNTREND. SPX is below its 50- and 100-week but still above its 200-week, the only ray of hope in a world of pain. The 200-week is at 3,579, and if that is violated sometime in the future, it will get even uglier. We have a ways to go before we hit those levels.

MACD (WEEKLY) = DOWNTURN. The WEEKLY MACD took a turn for the worse, as even the 9-day signal line reversed direction.

RSI: (S&P 500) @37.72 (DAILY) OVERSOLD. If you want a ray of hope, it will be found in RSI, which has been remarkably accurate in predicting overbought and oversold conditions (especially oversold). As RSI heads towards 30, be prepared for another snapback rally. Unfortunately, the snapback rallies haven’t lasted long, one of the reasons I am certain we are in a bear market.

Daily Intraday Volatility (VIX) = 26.30 HIGHER: The VIX rally reflects the increased purchases of put options, which means a touch of fear entered the hearts and minds of option traders.

Comment: Last week was an ugly one, and it was not a surprise. As you recall from last week’s comment, I recommended sitting and waiting. Those who bet against the market (or against any old stock) probably did well. This is no place for the inexperienced, and if you are, then trade cautiously.

As I wrote above, I am certain we are in a bear market, and it will take a long while to play out (bear markets typically last 14 to 18 months). I can make an educated guess that if this is a typical bear market, SPX and the other indexes will drop another 20 to 22 percent after the smoke has cleared. There will be many short-term rallies along the way, fooling those who know little about bear markets. Suggestion: Read my book, How to Profit in the Stock Market, to learn more about bear markets).

The Fed kept interest rates ridiculously low for years, and now they are warning they will continue to raise interest rates. According to a number of market professionals, if the Fed keeps raising rates as promised, they will crash the stock and housing market. I personally have no idea if this is true but I do know the higher interest rates will inflict more pain on investors and home buyers.

These are uncertain times so expect more trouble before it’s over. The old rules still apply, and that means trading or investing small, take the time to study bear markets, use dollar cost averaging tactics, and if you are losing money trading, stay on the sidelines. This is not an easy trading environment!

The Fed is meeting this week so it’s guaranteed to get volatile before and after the meeting. If the Fed makes an aggressive move with interest rates, it will get extremely volatile (and unpredictable depending on what Powell says).

MY TWO NEWEST BOOKS WERE RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F (Amazon) or https://bit.ly/3udwAUf (Barnes and Noble). Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – RALLY. The indexes had a relief rally last week, including SPX, which rose from 3924 to 4067, an impressive 143-point rally. Readers of this blog were not surprised because the market was extremely oversold (as revealed by RSI). SPX was able to rise above its 50-day moving average, but it has a long way to go before it’s out of the woods. Futures are flat on Sunday night.

Long-term trend (WEEKLY CHART) – IMPROVED. SPX improved a bit last week on the weekly chart but it’s still below its 50-week moving average.

MACD (WEEKLY) = IMPROVED. The WEEKLY MACD has improved but it’s still giving mixed signals.

RSI: (S&P 500) @50.94 (DAILY) NEUTRAL. RSI made the most dramatic improvement last week, rising from extremely oversold levels to neutral. As you know, when RSI drops to or below 30, a rally is typically coming, and RSI performed brilliantly. Indicators and oscillators aren’t perfect, but they are better than “playing it by ear” or relying on your “gut.” Last week, RSI warned us that a snapback rally was coming, and it did not disappoint.

Daily Intraday Volatility (VIX) = 22.79 LOWER: The low VIX reflects the complacency that has once again overtaken Wall Street.

Comment: I’ll keep this short and sweet. The Fed says it will be raising interest rates by another 75 basis points, which should be another blow to the housing and stock markets (if they do as they say). It appears the Fed wants a recession to help tackle inflation, and they will probably get their wish. As a result, the stock market is going to be volatile for the rest of this year.

It’s possible the rally that started last week will continue, but I wouldn’t bet money on it. In reality, we are waiting to see if the rally has legs or if there will be another failed rally. Right now, no one can say for sure, so the best advice is to SIT AND WAIT.

MY TWO NEWEST BOOKS WERE RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F (Amazon) or https://bit.ly/3udwAUf (Barnes and Noble). Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

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.

MY TWO NEWEST BOOKS WERE RECENTLY RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F (Amazon) or https://bit.ly/3udwAUf (Barnes and Noble). Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – SELLOFF. As you probably know, After Fed Chair Powell spoke on Friday, SPX and the other indexes sold off strongly, falling from SPX 4228 to 4057, a painful 171-point drop, as well as a 1000-point Dow drop. Powell hinted that he was going to keep raising interest rates, and market participants were not pleased. Sunday night: Index futures are selling off strongly, but that could change in the morning.

Long-term trend (WEEKLY CHART) – SELLOFF. On the weekly chart, SPX stalled at its 50-week moving average and fell below its 100-week moving average.

MACD (WEEKLY) = MIXED. The WEEKLY MACD is well above the 9-day signal line but is still below the zero line. Once again, Mixed Signals. 

RSI: (S&P 500) @43.89 (DAILY) SLIGHTLY OVERSOLD. RSI was the hero last week as it gave the strongest signal the market was obscenely overbought. How things change! Now RSI is oversold, and if the negative futures hold in the morning, RSI could get even more oversold. Translation: It’s likely there will be a rally this week based on RSI, but no one can predict when it will occur or how long it will last.

Daily Intraday Volatility (VIX) = 25.56 ELEVATED: For weeks, the VIX was telegraphing that option buyers were unconcerned with the market. On Friday, they spilled their coffee and other things, as reflected in the higher VIX.

Comment: As I wrote above, RSI has been deadly accurate in its predictions although the timing is imperfect. If you follow RSI this week, it is telling us that the market will continue to sell off in the short term, but a rally is likely (as RSI moves towards 30). Note: RSI does not have to go below 30 for the market to reverse direction.

Federal Reserve Chairman Powell really shook things up by simply stating that interest rates may be raised as the Fed continues its rate hike course. Whether the Fed actually raises those rates is another issue, one that is unknown at this time.

As I’ve warned in the past, we are in for a volatile, rocky road environment for a few months, if not longer. If RSI is to be believed, a rally is extremely likely, but not immediately. Just be prepared for a reversal (and please don’t make large bets in this market environment).

Bottom line: It’s a trader’s market and an investor’s nightmare.

 

MY TWO NEWEST BOOKS WERE RECENTLY RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F (Amazon) or https://bit.ly/3udwAUf (Barnes and Noble). Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  

Note: Check MarketWatch early in the week for an interview I did with a well-known TikTok influencer and financial author.

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – STALLED RALLY. Not surprisingly, the four-week rally stalled last week, falling from SPX 4280 to 4228, a 52-point pullback. The pullback took the other indexes lower, including crypto, which is below 22,000 again. As I’ll explain in more detail below, SPX went against the almighty 200-day moving average, and was repelled. Futures are lower on Sunday night, but that could change in the morning.

Long-term trend (WEEKLY CHART) – STALLED. On the weekly chart, SPX stalled at its 50-day moving average, and did not go higher.

MACD (WEEKLY) = MIXED . The WEEKLY MACD is well above the 9-day signal line but is still below the zero line. Mixed Signals. 

RSI: (S&P 500) @61.26 (DAILY) SLIGHTLY OVERBOUGHT. The hero of the week is RSI, which warned that the market moved up too far and fast. Last Monday, SPX rallied and RSI went as high as 73, an extremely overbought reading. Sure enough, SPX reversed direction the next day and the rest of the week, taking RSI to less extreme overbought levels.

Daily Intraday Volatility (VIX) = 20.08 COMPLACENT: The VIX is telling us that option buyers are not worried in the least about the market environment.

Comment: One of the reasons indicators are so useful is that they give you unbiased facts. As mentioned above, RSI was the hero because once again, it warned the market was extremely overbought. Add in the fact that on the daily chart, SPX smacked into its 200-day moving average, and couldn’t move higher. That tells me a rocky road is in the market’s future.

This week should be more volatile than usual (on certain days). Traders are waiting for Fed Chairman Powell’s comments at the annual Jackson Hole economic pow-wow. Powell may or may not give hints as to future rate hikes, which should affect the market.

Advice: It’s dangerous to make big financial trades when the Fed is going to speak. It’s akin to gambling, not trading, when taking large positions before a market-moving event.

Bottom line: Wait and see what the Fed has to say about interest rates, or if there is any other financial news.