Short termed bounce

It would appear that the summer lows for the US markets will be retested fairly soon. I would think that this level will support stocks – or at least offer some near termed support for a bounce.  If they don’t hold, it will be ugly. My last blog provided some macro indicators, including breadth indicators that do suggest an oversold bounce is possible shortly. Here is the link.

Further, we can see that daily momentum indicators are quite oversold. Note on the daily chart that we don’t see hooks on RSI and stochastics yet but they are likely to do so soon—MACD, a longer momentum study—looks ugly.

S&P nearterm

Should the lows of S&P500 at around 1870 break, the market looks to have a next level of support around the January 2014 corrections lows of 1700 or so (not shown on chart). That area of support is valid, but it is quite a bit weaker than the 1770 area. A break of 1770 will be unpleasant.

 

Interesting out-performance by US treasuries (TLT chart below), gold bullion (chart below) and utilities (XLU chart below) suggest that this correction is not your standard blip on the radar. Click on the charts to enlarge them. It is my opinion that a bounce should be used as an opportunity to lighten equity positions. Further evidence of out-performance by these 3 groups should be eyed before buying, but they should be on your potential buy list if the recent patterns continue.

xluTLT SHORTgold neartermed

I must admit that this correction caught me off guard. I held only 10% cash coming into this correction – and I have spoken with very savvy traders and technical analysts who are in the same boat. However, even when one gets blindsided by an unforeseen event, this does not give me or anyone else permission to stare into the abyss with no trading plan. As such, I expect to be legging out  of more stocks this week. There will be bounces to play in this market, but it appears to me that the action will be much  shallower and shorter in duration than the past year’s sideways moves. Further, the danger of a break of the August/September lows is a  very real potential.

17 Comments

  • If I’ve followed your plan correctly, if SPX stays below 1990 by today’s close, and doesn’t rally tomorrow, you’ll be heavily reducing positions.

    If I can ask, would you start this selling ASAP, in what would presumably be the non-rally depressed market conditions of tomorrow, or would you then be looking for a bounce of some sort to start selling?

    (I think I’ve got this part understood: if it does actually rally tomorrow, that doesn’t count as a bounce to sell into, but as a signal to NOT sell. Unless, I guess, a rally tomorrow starts with a test toward the 1870 region, in which case it IS a bounce to sell into.)

    Expect you are having a very busy day, so if you don’t get around to this any time soon, understood. Thanks.

    Reply
    • This market is so oversold that I would be amazed if we don’t get an oversold bounce to 1990-ish (old support neckline). So I am chancing it and seeing if that happens.
      My risk is not selling now then getting beaten down more if we get further large selling pressure. Sometimes this is a game of “chicken”.

      Reply
  • Hi Keith
    Since your Dec 7 2015 Market Outlook blog I’ve been following the Dow Jones Transports compared to the Dow Jones Index as my “most important” indicator. The transports have continued to drop but the DJ index has not caught up yet.

    I have a significant amount of cash to invest at the right time…should these two indexes exactly confirm each other before I put the cash to work?

    Many thanks for your insight.

    Reply
    • I would wait until a discernible base and breakout occurs before jumping in, and then you want to see both INDU and TRAN move together (up)

      Reply
  • Who will buy this bounce? One of my subscriptions has institutions selling. The economy sucks( see commodity prices). The P/E is real expensive. If she breaks 1870 you will likely get margin calls and then all hell breaks loose.

    Reply
    • Yes Bert– 1870 lows of the summer may break. But retail investors are still the likely ones to buy for a rally in the interim–it is “RRSP” and “401k” season after all. I see retail “Advisors” still pushing stocks. That is likely the fuel for a bounce–but not much from there.

      Reply
  • Interesting that spy broke the downtrend line starting Jan 5 today. Maybe get a bit upside in the next few days

    Reply
    • Yes–end of day higher close on Monday was a good sign for a rally. I expect to “Sell” into it as if when 1990-ish is reached.

      Reply
  • IJH (SMALL TO MID CAPS) HAS AN UGLY CHART: NECKLINE AT 136 AND DOWNSIDE TARGET AT …107.5. PMO+OBV ON THE DOWNSIDE AND SCTR RATING AT 35. WEEKLY CLOSING JUST AS BAD UNDER LONG TERM TRENDLINE AROUND 146 (*)… IJR (SMALL CAPS) ALIKE WITH NECKLINE AT 107.5 AND TARGET AT … 77.5. I FORGOT TO SAY HOW IMPORTANT IS A TRADE UNDER THE CENTER LINE M.A.C.D. (ZERO LINE)… WHY IS NOBODY TALKING ABOUT SHORTING THIS MARKET?: AFTER THE “SANTA CLAUS RALLY”, SHOULD WE WAIT FOR A TRADABLE BOUNCE!

    (*): STOCKCHARTS RECENT DATA

    Reply
    • I am certainly looking to sell into a short termed rally–which may have begun yesterday–we shall see. From there, I may initiate a hedge/short type position–typically I use bear ETF’s. First things first–sell into a rally.

      Reply
  • Will the herd go up the mountain or down the river? Interesting time…
    Thanks for your great blog and I wish everybody good times and good health.

    Martin

    Reply
  • “Should the lows of S&P500 at around 1770 break…”, did you mean 1870 or am I not seeing something? Thanks.

    Reply
  • If the longer term outlook is bearish, what would you suggest for a safe heaven for a long term invested? Should I start to buy some gold stocks to hedge the potential market drop?
    Might the gold would also drop when dollar keep rising.
    Appreciate your opinion.

    Reply
    • Nick–the long term–ie macro view is actually bullish–I believe we are in a secular bull that should/could last several more years. HOWEVER, the coming months have the potential to be ugly. I am not an Elliot Wave type – but I do believe in the concept of 5 market waves that have different characteristics. The current correction seems to line up with a “4th” wave correction/sideways move for the markets. This implies that, once over, we get a nice 5th wave finish to the end of the bull, which could be a few years. However, some EWT specialist might school me on that thought–so take it for what it is.
      Where to hide in the meantime? I am looking at this as a trading environment rather than a run for the hills situation. So I plan on jumping in and out as much as I can do so efficiently.
      Gold tried to break out recently–it may be ok if it can hold over $1080. I’d look at it as a trade for a few weeks if it continues to show strength.

      Reply
  • The P/E is pretty high in this market. At what value do you think the value investors will buy? 15? Or a book value?

    Reply
    • I’m not a fundamental guy–but i did mention the trailing PE on my blog today

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

one + twelve =

Never miss another blog post!

Get the SmartBounce blog posts delivered directly to your inbox.

Topics

Topics

Recent Posts

Smart dumb combined

Bear-o-meter continues to read bullish, in spite of it all…

bhp

A contrarian trading opportunity

bitcoin

Bitcoin & Dirty Harry

S&P

The NASDAQ has the greatest risk for correction at this time. 

spx vs 200 day

One sign that the market is overbought

ac

Airlines: A value play?

cta-bg

Never Miss an Opportunity

Sign up for our newsletter to receive valuable insights that are available only to subscribers.   Beyond the blog – beyond the videos – get the inside scoop.

Scroll to Top