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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What about the pending crisis in Ukraine, will this not cause a drop in all markets. Will this not add to the downward trend until it plays out. Your thoughts appreciated.
Mark–all world events and known news is factored into trend. You cannot predict anything, but you can prepare for whatever happens by having a trading system that identifies trend breaks, failures etc. Please see my course – or read my book Sideways. Both can help you understand this.
I like Canadian oil companies right now, both producers and pipelines. I am at a 28% weighting. Next highest weighting is Canadian banks at 23%.
Would it be crazy to invest more in the energy sector in the next few days as a trade until April.
Thanks for highlighting the seasonal January market weakness, and where you saw various support levels in the market. I took your advice and raised 27% cash.
Hey–good work Paul-glad I cold help!
I sold a small portion of my oil producers last week (luck and skill combined allowed me to sell before they sold off a bit). I am not re-buying until old breakout/new support levels are hit–and yes, they could be hit this week. I will buy if as when I see that happen. Could be any day now, or …. not. I don’t predict exact dates. I do prepare for when the time comes, though!
Thanks Keith for your opinion. Enjoy the weekend.
Keith, Please explain to us why geopolitical tensions are an issue for markets. I understand markets don’t like uncertainty, but what is it about say an invasion of the Ukraine that gets investors concerned?
One- why market jitters when the threat exists and
Two- what further impact to the markets possibly would occur and why, if some sort of invasion were to occur.
I cannot imagine this would turn into a WW, rather it would remain contained inside of the Ukraine. So other countries economics would be minimaly impacted no?
My belief is that it comes down to investor psychology – not reality. Fear of the unknown. You are likely correct, not a WW3 inspiring event–but there are those who would rather not find out and thus flee the markets. Also–sanctions against Russia mean less trade, and thus less profit for anyone doing business in that region. Plus the uncertainty surrounding taking their oil off the USA market as a punishment (which would help increase oil prices- one more reason to be bullish).
Big issue is the uncertainty thing. its not what will happen, its what is in the imagination of market participants about what could happen.
Keith another “fundamental” question vs a “technical” one is the following.
Why is it that the oil commodity price is rising but the oil producers which directly benefit from higher oil prices have not risen proportionaly?
I think there are a few reasons why there is often a lag by the producers behind a fast moving commodity. I believe this is because the markets wait to see if the commodity stays high before factoring in the future earnings. Also, there are inefficiencies (cost of production etc) that keep producers differing in direct proportion from their product rising. Finally, the stock market as a whole is like the tide–all ships rise and fall with the tide–so producers will move with that tide at a certain beta. Whereas commodities march on a separate market so there is a bit of disconnection.
The “War” card has added force to this market weakness and even darling Oil is pulling.
S&P 500 @ 4287. 00 at this time. Capitulation flush or more down side weakness after breaking support?
See my reply to Wendy. intra-day moves are less material, but we shall see how the next 2 days plays out.
What are your thoughts now that the S&P has cracked below not only the 3450 level but today below the 3000 level?
We are significantly above the 32 level on the VIX today too. What are your other indicators suggesting and what would be the next level of resistance on the S&P to
watch for as markets continue to fall?
I do have money to invest, so I am in a good position that way.
Intra day one day moves can form a washout bottom. I do not pay attention to brief intra-day moves below support. I pay attention to sustained breaks- and especially based on closing prices over 3 days. I note that the VIX crossed my 32 minimum capitulation signal. Everything is set up for a washout in the next day or so. In fact – today (Monday the 24th) could be the washout. No prediction, but it sure is looking that way now- we shall see.
Do you consider today as breaking the support line?
stink bid time? Large cap tech MSFT, NVDA, AMZN, SHOP??
Troglodyte mine(d) inquiry 🙂