Pop quiz: here’s the facts, you guess the outcome

 

The daily chart below looks at a few of my favorite indicators as applied against the S&P500. Let’s examine these indicators, and you can draw your own decisions as to whether the recent correction is just about over, or if it has another leg down. I’ll add my two cents worth along the way.

S&P nearterm

  • Trend channel: BULLISH. Higher highs, higher lows. The S&P is just touching the bottom of the channel. Sometimes channels can be broken temporarily too- we call these momentary (1-3 day breaks) “spikes and tails” within technical analysis lingo. So far, the trend is in place.
  • Moving averages: BULLISH. The 50 day has been broken. I find the accuracy of the 50 day, or anything shorter, less important to my trading horizon – which is at least 3 months. More importantly, the 200 day MA is both sloping up (important!) and has not been broken. Like trendlines, sometimes the 200 day MA can be cracked for a short time period without serious repercussions. Another positive trend indicator is holding.
  • Short termed momentum: NEAUTRAL/BEARISH. Stochastics, the fastest indicator on this chart, is oversold but not hooking up. RSI, which is the next fastest momentum indicator I’m using here (14 day) is oversold and questionably hooking up or sideways at this point. All in, more evidence needs to be seen before a confident buy signal arrives.
  • Long termed momentum: BEARISH. MACD tends to lag the market a bit, given that its very composition is derived by calculating the difference between 2 moving averages (which are lagging indicators!). The MACD is heading south. Nowhere near a buy signal.
  • Volume on the selloff: BEARISH. A low-volume market peak at 1850, followed by a high volume decline in January into this month is bearish. The conviction is with the sellers, not the buyers.
  • Moneyflow: NEUTRAL. Accumulation/Distribution is my favorite longer termed moneyflow indicator. Moneyflow shows you, as the name implies, how much money is flowing into or out of the market. This indicator has flattened. That’s not too worrysome on a daily chart.
  • Sentiment: NEUTRAL. Sentimentrader’s “Smart $/ Dumb$” index (www.sentimentrader.com) has gone from a bearish reading in December which lead us into this correction (perfect timing!), to neutral territory. See the chart below. Smart money is coming back into the room, and unsophisticated investors are beginning to lose confidence. The bottom pane is the overall spread between smart (sophisticated) and dumb (retail/emotional) money. A break below the lower line is bullish (smart guys are bullish, dumb guys are bearish) and  a break above the top line is bearish.  All in, its encouraging to see the direction of this indicator, but their levels don’t indicate a sign of turnaround just yet.

 smart

Conclusion: The longer termed trendlines and moneyflow indicators are intact, but the shorter termed momentum indicators are bearish. Sentiment doesn’t show an oversold condition yet either. My bet is for a little more downside yet, perhaps to my originally posted target of around 1720.  This coincides with a support level I noted in a prior blog ( https://www.valuetrend.ca/?p=2722), along with the 200 day MA. Post your thoughts and interpretations below. Remember: We’re all in this together!

6 Comments

  • SO MANY INDICATORS TO TAKE INTO CONSIDERATION WHILE ASSESSING A CHART. SO HARD TO PICK THE MORE VALUABLE ONES. SO EASY TO GET IT WRONG. THANKS FOR YOUR HELP!

    Reply
  • Well,I was looking forward to a correction to pick up some pipelines cheap…… no such luck! What does it take to bring their sp down?!!

    Reply
    • Mark–comparative relative strength is one of the highlights of a great stock sector. The dips will be smaller in a leading sector, as they are for the pipe’s. Yesterday they dipped a little, and we bought a bit for some individual accounts outside of our equity model–we’ve held 2 pipes in our equity model for many months now and have enjoyed the trend–expect more to come. Small dips is likely all you’ll get on this sector.

      Reply
  • Hi Keith,
    Can you provide a source or a website where I can access The Smart Money Dumb Money Confidence Graphs you’ve illustrated above.
    Thanks for any information you can pass on.
    Regards,
    Bill

    Reply
    • Hi Bill
      Its a subscription site–but the cost isn’t outlandish–www.sentimentrader.com
      Jason Goepfert is the owner of the site—he provides an outstanding daily commentary emailed to you, as well as access to so many sentiment indicators it would make your head spin. I highly recommend the site–tell them I sent you (I get nothing for the endorsement, but I have a friendly rapport with Jason and respect his work)

      Reply

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