The Weekly Trader

MY TWO NEWEST BOOKS WERE JUST RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F . 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) – LOWER. SPX fell from 4158 to 4108, a relatively mild 50-point drop. Futures are flat on Sunday night but that could change in the morning.

Long-term trend (WEEKLY CHART) – LOWER. SPX is below it’s 50-week and is nearly even with its 100-week MA. This means that the long-term view is leaning bearish.

MACD (WEEKLY) = LOWER . The WEEKLY MACD is below the zero line and below the 9-day signal line. It’s not a pretty picture.

RSI: (S&P 500) @50.14 (DAILY) NEUTRAL.  RSI is right on the 50, which means SPX is neither oversold or overbought. We will have to wait for additional clues this week before taking a position.

Daily Intraday Volatility (VIX) = 24.79 = NEUTRAL: VIX is slightly elevated but nothing to write home about. We are not getting meaningful clues from the VIX right now.

Comment: After a spectacular one-week rally, SPX and the other indexes took a breather. If this was a bull market, the rally would have continued a lot longer than a week. This tells me we are in or about to enter a bear market. Unless there is a strong and lengthy rally, you must assume the worst (at least I do).

On the other hand, there is so much bearishness it’s possible we will get another surprise rally. However, even if there is a rally, it’s unlikely it will last for long. That simply confirms we’re in or about to be in a bear market.

If a bear market is confirmed (20 percent lower from its recent high), it will not be fun and games. It’s a good time to raise cash, to look for good stocks but also aim to buy them at much lower prices. Many value investors welcome a bear market because they can finally buy their darlings at reasonable prices.

On the other hand, a bear market is a difficult trading environment for most people, especially buy and hold investors. Look at Netflix, for example, dropping from $700 to $198 within six months.

There are other stocks like Netflix where its true value is extremely distorted. No one knows which stocks are obscenely overbought and which ones are trading at fair value. Unfortunately, in a bear market, even many great stocks get hammered. Expect and prepare for a difficult trading and investing environment.

Advice: If anyone claims to know what the market is going to do next, don’t believe them!

 

MY TWO NEWEST BOOKS WERE JUST RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — NOTE: For a limited time, I am offering a signed copy of either book for $24 (list price) plus $3 shipping (in the U.S.). Email me if you want a signed copy of one or both books.

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. As expected, the long anticipated rally appeared last week, temporarily breaking the downtrend. SPX rose from 3901 to 4158, a mind-blowing 257-point rally. However, this doesn’t mean the bear market is over (more on this below). Futures are lower on Monday night, but that could change in the morning.

Long-term trend (WEEKLY CHART) – LOWER. Even though we had a spectacular rally, the downtrend is still intact. SPX needs to rise above its 50-week MA and stay above its 100-week MA for the trend to change.

MACD (WEEKLY) = LOWER . The WEEKLY MACD is still below the zero line and 9-day signal line.

RSI: (S&P 500) @53.72 (DAILY) NEUTRAL.  RSI did an excellent job of alerting us to extreme oversold conditions. When RSI fell at or near 30, SPX rallied strongly. RSI is not a perfect indicator, but it has been very accurate over the last year.

Daily Intraday Volatility (VIX) = 25.72 = ELEVATED: While everyone else was freaking out over the 7-week selloff, VIX was saying, “What me, worry?” Sure enough, the VIX fell to more “normal” levels last week, indicating that option longs are not worried enough to buy many puts for protection.

Comment: For several weeks, I had said that a monster rally was likely, and sure enough, it arrived. Nevertheless, a one-week rally does not change the long-term trend. Typically, during bear markets, there are monster rallies, sometimes lasting longer than a few weeks, that lure many bulls back into the market. Then the market really plunges!

As I’ve said before, no one can predict what kind of bear market this one will be, but it’s guaranteed to fool a lot of investors and traders after it has run its course. This should be a very tricky trading experience, giving many losing investors the hope they can get all their money back. And just when it seems like all is well, it’s possible the worse is yet to come.

This is not a prediction, but based on past bear markets, the odds are good that more pain is coming in the future. This is the time to be on guard and bring your “A” game.

Bottom line: No one knows what the market will do this week. That depends on many factors, including whether the Fed continues to raise interest rates.

MY TWO NEW BOOKS WILL BE RELEASED IN TWO DAYS: My two newest stock market books will be released on Tuesday. Here is the link to Understanding Stocks (3rd edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — I discuss how to manage corrections and bear markets — and examine the most important indicators and oscillators. 

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. The falling market has become big news in the financial media. For the eighth week in a row, SPX plunged, this time from 4023 to 3901, a painful 122-point drop. It could have been a lot worse but we had another “turn-around” Friday. On Friday, the Dow and SPX fell by 20 percent from its recent high, which triggered a technical bear market definition. It also triggered short-term buy programs, allowing both indexes to narrowly escape the bear market designation. That is little satisfaction to long-only investors, who are nursing huge losses. Futures are HIGHER on Sunday night. It is possible this rally will have legs (i.e., it may last longer than one day).

Long-term trend (WEEKLY CHART) – LOWER. On the weekly chart, SPX is still below its 50- and 100-week moving averages, but remains above its 200-week MA. The long-term outlook is not great, but there is room for a strong rally this week. (Note: Always watch the rallies for signs of strength.)

MACD (WEEKLY) = LOWER . The WEEKLY MACD is below the zero line and the 9-day signal line. It’s a lagging indicator, which reflects the damage the indexes have experienced in the past. It may take a while, but we will use MACD to help us find an eventual (and tradeable) bottom.

RSI: (S&P 500) @35.47 (DAILY) OVERSOLD.  Once again, RSI fell to near-30 (on Friday), and bounced. If there is any good news, it’s that the indexes are oversold in the short term, so a relief rally is likely this week or in the near future.

Daily Intraday Volatility (VIX) = 29.43 = ELEVATED: VIX is higher than 20 (typically a normal reading), but the higher VIX reading does not reflect extreme fear. Prognosis: The VIX is high, but it’s not at panic levels.

Comment: Because the market has sold off for so many weeks, and because there is so much doom and gloom on Wall Street, and because RSI is oversold, the odds of a strong rally is likely. Futures are higher on Sunday night but the question is: Can it carry over to Tuesday and beyond? That would be a relief to investors, the reason it’s called a “relief rally.”

We are not predicting a rally, but in past bear markets, strong rallies often lured the bulls back into the market. Then the bottom really fell out! Since every bear market is different, no one can predict how this potential bear market will develop.

Technically, the Dow and SPX are not in a bear market, but that could change in the future. One of the clues that a rally is possible is the 500-point Dow reversal on Friday. Obviously, enough institutional buyers entered the market (along with algos) to keep the market afloat. That was a positive sign (within a sea of bad news).

Eventually, investors will have to deal with a strong likelihood of a bear market (the Nasdaq is already in one by definition). It’s a good idea to have a plan of what to do if all three indexes keep plunging. For now, be prepared for any scenario, and don’t panic (easier said than done).

If we do get that rally, and if it lasts a while, many investors may consider selling some, not all, of their positions, a decision only you can make.

One thing for sure: Bear markets and corrections are difficult to manage, as millions of investors and traders have discovered the hard way.

MY NEW BOOKS: My two newest stock market books will be released on May 24th (although books are available at most Barnes and Noble bookstores. Here is the link to Understanding Stocks (3rd edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — I discuss how to manage corrections and bear markets — and examine the most important indicators and oscillators. Sample pages are available on the above websites.  

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. SPX fell from 4123 to 4023 last week, a 100-point drop. On the daily chart, all of the indexes are below their 50-, 100-. and 200-day moving averages. It could have been even worse but Friday’s rally reduced the damage somewhat. This will be the 7th weekly selloff in a row. The only good news is that the markets are getting oversold, so a monster rally is likely in the near future.

Long-term trend (WEEKLY CHART) – LOWER. Unfortunately, SPX fell below its 50- and 100-week moving averages on the weekly chart, not a good sign for long term investors. Fortunately, all of the indexes are still above their 200-week MA, even though the Nasdaq is in a bear market. (Take a look at the Nasdaq on the daily chart to see why).

MACD (WEEKLY) = LOWER . The WEEKLY MACD remains below the zero line and the 9-day signal line. Because MACD is a lagging indicator, this is not surprising.

RSI: (S&P 500) @38.73 (DAILY) OVERSOLD.  RSI fell below 30 last week, an extremely oversold reading, and right on cue, the indexes rallied the next day. Recently, I have found RSI to be remarkably accurate with indexes when extreme readings are hit.

Daily Intraday Volatility (VIX) = 28.87 = ELEVATED: VIX is still higher than it’s “normal” reading of 20 but it’s not even close to reaching a top (at 40 or 50, when the markets appear to be crashing, many counter-trend traders go long). A VIX in the 20’s tells me that option traders are only slightly concerned but not afraid (maybe they know something we don’t!).

Comment: It’s been a rough 7 weeks for investors and crypto traders (some of the stories of losses that I heard from bitcoin traders are frightening). It’s terrible for the ego and investment account when winners turn to losers. As mentioned earlier, the Nasdaq is already in a bear market, and the odds are good that the Dow and SPX will follow it. Not guaranteed, but likely.

Because the indexes are so oversold, a monster rally is likely. That will lure many previously bullish investors back into the market, and many will believe the worst is over. This is not a prediction but based on previous bear markets, this scenario is likely. Bear markets are very tricky animals: In the middle of these awful selloffs, there are these huge “blow-your-socks-off” rallies, although they typically fail.

The Bad News: If the other indexes fall into a bear market, this event “could” last as long as a year, testing the patience and emotions of many investors and traders, especially rookies.

The Good News: As Lance Roberts said in his blog, “It’s so bearish it’s bullish,” and he’s right. Most investors have lost money, and are exceedingly bearish, which is actually a bullish sign. As I said earlier, a rally is likely.

Bottom line: These are unusually treacherous times so it’s essential to be alert to any possibility. The FAANG stocks are reflecting some of the worst losses. It would not be surprising if many other stocks followed the Nasdaq into the abyss (but not right away).

MY NEW BOOKS: My two newest stock market books will be released on May 24th. Here is the link to Understanding Stocks (3rd edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Markethttps://amzn.to/35lnjQy  — I discuss how to manage corrections and bear markets — and examine the most important indicators and oscillators. 

Today’s MarketWatch column: https://on.mktw.net/3vWhQdC

WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK

Short-term trend (DAILY CHART) – LOWER. SPX retreated for the sixth week in a row, from 4131 to 4123, a mild 8-point drop. The problem is that after a monster 1000-point Dow rally, the next day the market gave up all its gains. The lack of a follow-through was very negative. The charts are awful: SPX is below all its moving averages on the daily chart. Futures are LOWER on Sunday night, but that could change in the morning.

Long-term trend (WEEKLY CHART) – LOWER. SPX is below its 50-week moving average and barely above its 100-week. From a longer-term perspective, this is not good for the bulls.

MACD (WEEKLY) = LOWER . The WEEKLY MACD is below the zero line and the 9-day signal line. Not good for the bulls. 

RSI: (S&P 500) @38.77 (DAILY) OVERSOLD.  Unfortunately, RSI is oversold but not at extreme levels yet. Investors are feeling pain, but there is room for the market to keep falling. At 30 RSI or below, SPX will be extremely oversold.

Daily Intraday Volatility (VIX) = 30.19 = ELEVATED: VIX is higher than in the old days of 20 and below, but it is not at extreme levels yet. Option traders are buying puts for protection but few are panicking yet. This tells me we have a long way to go before we hit a bottom on the indexes.

Comment: I know from my neighbors how bad it is. One of my neighbors owns the ARK fund, managed by Cathie Wood, and is getting creamed. My other neighbors own the MAANG stocks (Meta, Apple, Amazon, Netflix, and Google). Netflix caused the most financial pain, plunging from $700 per share six months ago to $180 on Friday. As I wrote in today’s MarketWatch column ( https://on.mktw.net/3vWhQdC ), that’s not a bear market, that’s a crash. 

Speaking of bear markets, the odds are good that the S&P 500 and the Dow will follow the Nasdaq into bear market territory. Based on technical analysis and historical trends, do not be surprised if the S&P 500 falls to 3200 to 3400 (this is an educated guess, not a prediction). 

Bear markets typically develop over a short (one to three months) or a long (one year or longer) time period. That means that it will likely be a painful journey lower over many months or a year. 

Many investors won’t look at their accounts or will avoid discussing the stock market. Some stocks will recover in the future (it may take a long time), while other stocks may not ever return to their old highs. No one can predict which stocks will succeed and which will fail. The only thing we know for sure is this is going to be painful emotionally and financially for many investors. 

My newest book, How to Profit in the Stock Market, discusses bear markets, corrections, and crashes. As I was writing this book, the market continued to move higher and higher into year end. Because I saw clues that the market was topping out, I was able to include a lengthy discussion on all three market events.

What were some of the clues? One TV host in particular continued to brag about how much money he and his followers had made in the market. He showed photos of his lavish lifestyle on Twitter, including an extravagant Christmas dinner. That was the top! 

Other clues: RSI was overbought, MACD had flattened, and the rallies were losing strength. Investors were exuberant, few were selling (because of a fear of missing the next rally), and no one believed a pullback would last longer than a few weeks. 

In December, I wrote a column about the predictions of the late Mark D. Cook, who warned that this overbought market was on its last legs. Cook always told me that prices are always the last to fall, and he was right. The bear market was already developing in December before most people realized it. It’s similar to a bridge that looks solid on the outside but rotting underneath.

The good news is that if you are patient, there will be fantastic opportunities to make money when the “bottom” is reached. How do you know there is a bottom? If SPX and the Dow enter bear market territory, we will use our indicators, oscillators, and clues to identify a good entry point. The goal is not to catch the exact bottom (as that is nearly impossible) but to buy at much lower prices than now. 

It was a lot more fun making money on the way up. On the way down, it will test the emotional fortitude of many investors who say they are in it for the long term. Unfortunately, as history has shown us, in the deepest depths of a bear market, many panic sell (when losses are at 50 percent or more), just when the market hits bottom. 

No matter what happens in the future, this is guaranteed to be an educational experience for many.