The Weekly Trader

Notice: My publisher, McGraw-Hill, informed me that two of my books, Understanding Options, and Understanding Stocks, have sold more than 100,000 copies each. They are putting a special “sticker” on the cover of each book advertising that fact. (I want to thank all readers for helping to make this happen.) 

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Lower. The bears took control all week. SPX fell from 4535 to 4458, a painful 77 point drop. Futures are HIGHER on Sunday night, but in the morning anything is possible.

SPX 20-day moving average (WEEKLY): Uptrend. SPX is still above its 20-day moving average. To breach the short-term 20-day MA, the market will need to keep falling. We are not there yet.

RSI: (S&P 500) @65.69 (WEEKLY) = Slightly Overbought. Not surprisingly, the market fell last week after RSI hit extreme overbought levels. Criticize technical analysis if you want, but RSI was right on target, warning us of trouble. Now RSI has fallen to only slightly overbought. RSI is telling us the market is not out of the woods yet.

MACD (WEEKLY) = Neutral. Yawn, nothing to see here. The weekly MACD is giving mixed signals. MACD is above its zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. Note: MACD does not work well when SPX volatility is low (and the indexes are at all-time highs). However, MACD still works with volatile individual stocks. 

Daily Intraday Volatility (VIX) = 20.95 = Wow! VIX actually popped last week as a touch of fear entered the market. The VIX is still on the low side even though it’s out of the basement. This means more fear is possible, but not guaranteed.

Comment:  With last week’s low VIX and high RSI, it was obvious that trouble was coming, and it arrived. Five down days in a row. The bulls did a good job of preventing a massacre, but the bears finally flexed their muscles. We shall see if it’s a the beginning of a downtrend or a five-day wonder.

The algos, using the S&P futures contracts, are doing their best to convince everyone that last week was an outlier. Futures are a bit on the sleepy side but they are higher on Sunday night. It will be fascinating to see if the bullishness can carry into the morning. All eyes will be watching the opening bell.

I can tell you this: If the market opens higher and reverses direction during the day, that would be a negative sign. The bulls need a strong showing this week to keep the bears away.

I am watching RSI, which is still overbought. According to classical technical analysis, it was not a great sign when RSI sliced through the 70 on its way to 65. Keep your eyes on the major indicators for clues, and any signs of a reversal.

Bottom line: The bulls are desperate to take back control after losing five precious days. Let’s wait and watch to see if they succeed.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

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

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

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

Notice: My publisher, McGraw-Hill, informed me that two of my books, Understanding Options, and Understanding Stocks, have sold more than 100,000 copies each. They are putting a special “sticker” on the cover of each book advertising that fact. (I want to thank my readers for helping to make this happen.) 

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Slightly Higher. The bulls kept control during the week, bringing the market to extremely overbought levels. SPX rose from 4509 to 4535, a mild 26-point advance. The indexes remain at all-time highs. Futures are relatively FLAT on Monday night. In the morning, we will have a better idea which way the market winds are blowing during this shortened week.

SPX 20-day moving average (WEEKLY): Uptrend. SPX is above its 20-day moving average and is still in a strong uptrend. To paraphrase what I wrote last week, “The short-term trend looks wonderful. Unfortunately, moving averages don’t predict the future.”

RSI: (S&P 500) @73.53 (WEEKLY) = Extremely Overbought. If you believe in technical analysis and RSI, you may be shocked at these extremely overbought readings. While indexes can stay overbought for long time periods, the potential for a major pullback is high. No one can predict the day or time of the reversal, but it is guaranteed to catch everyone by surprise when it happens.

MACD (WEEKLY) = Neutral. Nothing to see here. The weekly MACD continues to give mixed signals. MACD is above its zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. Note: MACD does not work well when SPX volatility is low (and the indexes are at all-time highs). However, MACD still works with volatile individual stocks. 

Daily Intraday Volatility (VIX) = 15.68 = How low can the VIX go? Let me count the ways. A super high RSI and a low VIX is a dangerous combination. Unless the algos have negated technical analysis (some traders claim that’s exactly what has happened), then the stock market is in for a world of hurt.

Comment:  I never thought RSI could get this overbought on the weekly SPX, but it’s happening. I feel sorry for anyone shorting the indexes as the pain must be excruciating. I suggest watching The Big Short this week as a reminder of how crazy things can get before it all comes crashing down. While you should not fight the tape, caution is advised.

No one can predict crashes, corrections, or bear markets. All we can predict is that they do occur every few years. Our last bear market was in March 2020, and it lasted less than a month. In theory, this bull market could continue for another year or so. Anything is possible.

Nevertheless, the extreme RSI reading is a huge warning sign that can’t be ignored. As it turns out, many people are ignoring the signs. As we enter the typically rough September-October time period, don’t forget how overbought this market is, and let’s see who wins the month: technical analysis or the algos. (So far, the algos are winning.)

Retail investors are riding the trend higher fueled by low interest rates and a friendly Fed. The scary part for me is how so many investors are oblivious to the risks. It’s as if people are just “throwing caution to the wind” and buying anything that moves higher no matter how overpriced.

Bottom line: The trend says we’re going to the moon, but the overbought-oversold indicators say the party has been going on way too long. Avoid predictions and follow the facts (and not your emotions). As for me, I wouldn’t be betting big on either side.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

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

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

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

Notice: My publisher, McGraw-Hill, informed me that two of my books, Understanding Options, and Understanding Stocks, have sold more than 100,000 copies each. They are putting a special “sticker” on the cover of each book advertising that fact. (I want to thank my readers for helping to make this happen.)

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Higher. The bulls took control during the week and ran with the ball. SPX rose from 4441 to 4509, a strong 68-point advance. Exuberance has gone through the roof as indexes flirt with all-time highs. Futures are FLAT on Sunday night.

SPX 20-day moving average (WEEKLY): Uptrend. SPX is above its 20-day moving average in a strong uptrend. Everything looks wonderful in the short term but moving averages don’t predict the future.

RSI: (S&P 500) @72.50 (WEEKLY) = Extremely Overbought. The skunk at the bull party is RSI, reflecting extremely overbought readings on SPX. While indexes can stay overbought for long time periods, the potential for a severe pullback is high. No one can say when, unfortunately, but we are looking for signs.

MACD (WEEKLY) = Neutral. Nothing to see here. The weekly MACD is still giving mixed signals. MACD is above the zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. Note: MACD does not work well if SPX volatility is low but MACD does work with volatile individual stocks.

Daily Intraday Volatility (VIX) = 16.39 = It’s a mad, mad, mad world. The VIX fell a few points as fear went back on holiday. One of these days, volatility will return with a vengeance, but until then, enjoy the ride higher, but please put on your seatbelt.

Comment:  The over-confident bulls took the market into the stratosphere. As long as you’re not selling short, it’s easy to make money in the market. Not only has fear been on holiday but so has risk. Buy and hold the indexes or any old stock and you can’t lose. If I sound sarcastic, it’s because I am.

An entire generation of investors believe that it’s EASY to make money in the market. That is a scary thought. I never could have predicted that the market would rise for 13 years straight with only a few weeks pullback along the way.

The overbought reading from RSI is a red flag that should not be ignored. While it’s common for some stocks to remain overbought for long time periods, rarely have I seen the indexes remain this overbought for very long. I would not be surprised to see a major pullback, but no one can say when. My advice is to look for clues because they will appear one day.

As the market moves higher and VIX moves lower, the market gets more and more overbought. At these statistically stupid price levels, it wouldn’t take much to pop the bubble and bring us back to reality. No, it doesn’t mean to sell everything and move to cash. It does mean to evaluate what you own, the risks you are taking, and what would happen to your portfolio in a worst-case scenario.

Bottom line: We are in untested waters so anything is possible. Hint: Keep your eyes on the Fed.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

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

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

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

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Sideways. The bears took control early in the week but were unable to defend against a late-week bull assault. SPX dropped from 4468 to 4441, a moderate 27-point decline. Futures are FLAT on Sunday night as the indexes flirt with all-time highs. 

SPX 20-day moving average (WEEKLY): Uptrend. The SPX 20-day MA fits into our short-term weekly trading strategy. The 20-day is above its moving average, which is bullish.

RSI: (S&P 500) @69.64 (WEEKLY) = Extremely Overbought. SPX is extremely overbought according to a near-70 RSI. The algos will have to work overtime to prevent a major selloff.

MACD (WEEKLY) = Neutral. The weekly MACD is still giving mixed signals. MACD is above the zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading (although if you look closely it’s a smidgen below). As mentioned in the past, MACD does not work in a low-volatility environment.

Daily Intraday Volatility (VIX) = 18.56= The VIX jumped a few points on a little fear early in the week. VIX is still low but it climbed out of the basement. One of these days, volatility will return with a vengeance, but until then, be patient. 

Comment:  After RSI went above 70 last week, just as we warned, the market sold off hard for a couple of days. RSI even dropped to 65 during the week, still overbought but not at extreme levels. As predicted, the algos pounced later in the week, saving the SPX but also spiking RSI.

It is what it is: RSI is extremely overbought and VIX displayed a slight increase in fear as option traders initiated put protection hedges. We are still in the volatile season (August to October) for the stock market, but volatility hasn’t lasted longer than a day.

So where does that leave us? Until further notice, the algos are the main market mover. A touch of fear appears on occasion but the algos swoop in quickly to reverse the negativity. I’d hate to be a short seller right now, although their day is coming. No one knows when, but I wouldn’t be surprised if it’s soon.

Bottom line: We’re at a stalemate for now. The bulls are defending against a very weak bear team. The market could go in either direction this week so it’s a mistake to put much money on the outcome. If you’re an investor, the market is still in an uptrend. If you’re a trader, it’s better to wait and see which way the wind will blow.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

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: https://wolfstreet.com

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Uptrend. The bulls squeaked out another win last week. SPX rose from 4436 to 4468, a 32-point advance. Futures are LOWER on Sunday night as the indexes flirt with all-time highs. 

RSI: (S&P 500) @72.36 (WEEKLY) = Extremely Overbought. I have not seen RSI this high since right before the March 2020 Covid crash. Does this mean the market is going to crash again? No one knows. I will have more to say about this below.

MACD (WEEKLY) = Neutral. The weekly MACD is still giving mixed signals. The MACD line is above the zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. As mentioned in the past, MACD does not work in a low-volatility environment. Until volatility returns, use another indicator. 

Daily Intraday Volatility (VIX) = 15.45= The VIX keeps moving lower and lower (as the RSI keeps moving higher and higher). One day volatility will return with a vengeance, but until then, be patient.

Comment:  A ridiculously low VIX and an extremely overbought RSI during the traditionally worst two months of the year (for stocks). I am not in the prediction business so I won’t even try, but I can say there are red flags everywhere.

As I wrote above, RSI on the SPX hasn’t been this high since last year, and that ended badly. I have no doubt this market is going to end badly, but I sure wouldn’t make a bet on when. Why? Because the algos are overriding all of the technical and fundamental signals. We are really in uncharted territory, and have been for a long time.

Can the algos keep running the market higher while RSI gets even more overbought? Yes, indeed. Just be aware that something will probably come out of left field one day and catch everyone by surprise. Just be on guard. At RSI 72.36, I am in awe. And yet, overbought markets can get more overbought (especially when your best friend is an algo).

Bottom line: Be defensive and that means not taking big risks in this environment. The market is moving higher on hopes and wishes, and not much else.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

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: https://wolfstreet.com