The S&P 500 has pulled back about 8% so far this month. I feel we are nearing the capitulation stage of this correction, particularly as we approach key support areas – which I will cover below. As I predicted in this blog posted January 3rd, the market was primed for a correction. At that time, the SPX was trading near 4800. I anticipated 2 levels of support. The first was 4600 – which was tested in mid-January. The next, should 4600 fail, was 4400. That’s where we sit today.
My logic behind those two targets was that the trend channel, were it to hold, would see a 4600 test. If that broke, the next level down would be somewhere between the 200 day SMA (which was 4450 at the time) and next support in the mid-low 4300’s, but I will admit that my view was a test of closer to the 200 day SMA – just over where the market lies now. My prediction was (read the blog to confirm this) for an ultimate target (if the trend channel broke) of somewhere near 4400. That’s about where we sit right now. Below is the chart illustrating these points.
Other points to consider
- If the 200 day SMA does not support the market, we should anticipate around 4350 as the stopping point.
- The end of January is often seasonally soft, followed by a rebound in early February. That means the next week is a seasonal buy window.
- End of February has a seasonal tendency to again be a bit soft. But this leads us into the very strong seasonal period in March-April. See my January 3rd blog referenced above.
- Momentum oscillators on the daily chart above have not hooked up yet. Still, they suggest an oversold condition. We need only the hook to confirm a buy signal, and that could occur any day now.
- Sentiment indicators are largely bullish – some are aggressively screaming buy- see my charts below. To learn more about using sentiment indicators, read my book Smart Money Dumb Money here.
Sentiment is growing bullish
Smart money is buying into dumb money fear, as seen in the Smart/Dumb ratio compilation from Sentimentrader below:
Put to call ratio is becoming bullish:
Here is the New High/Low indicator which is deeply into bullish territory – this signal has historically been a very accurate buy signal – and this time its a strong signal.
The VIX is not at a high-conviction buy level, but it is darned near that point. If/as/when it breaches 32, you will get an historically accurate buy signal. Its at 28 as of Friday’s close. This could be close enough for the buy signal now. You may note on the left side of the chart – it has hit the high 20’s and reversed into signaling a broad market rally many times.
On January 3rd I warned you of a pending correction. Now I’m calling for an entry point this week.
We at ValueTrend always follow our own advice – so we raised about 10% cash in our Equity Platform in preparation for this potential. Now that we are getting many signals that the end of the correction is approaching, we are looking to buy equities in the coming week. There is a decent chance that we have witnessed the low of this correction on Friday. If not, a low is likely this week.
I like to see at least three days of consolidation or upside to confirm the bottom (i.e. its ok to buy higher to be safe). But I do expect to be backing up the truck and loading it with equities in the very, very near term. Watch for a series of support over 3 days.
Bottom line: Friday’s level of 4400 is support, with a maximum probable downside to near 4350.
Watch for one of those support levels to hold as a buy signal. You have been notified.
Want to know what to buy in this correction?
I just posted a video on why I think the TSX is going to outperform the US markets. Its Canada’s turn! Here is the video.
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