I’m posting my S&P 500 chart with updated annotations that I’ve presented a few times over the past 3 weeks. This weeks chart (below) shows a few developments, which I’ve circled, leading me to believe that we may have seen the capitulation bottom last Wednesday. I’ll go over these points here:
- Two back to back candlestick hammer formations on Wednesday and Thursday of last week–circled. Hammers are similar to “key reversal day” bars. These bars show us how weaker hands sold off aggressively during both days to finish near the top of the day, near the opening. This typically occurs because stronger hands, or “smart money”, is picking up the bargains from emotional panicking investors. A big day like Wednesdays 50-point selloff, followed by a large move back to near the top of the day suggests a capitulation bottom. Thursday’s followup high-close hammer (second hammer candlestick – circled) was particularly encouraging.
- Speaking about last Wednesdays capitulation low – that low point hit a significant support level at a prior low (1820), and successfully bounced off. Thats a good sign for further upside.
- For the first time since this correction began, we are seeing early signs of “hook-ups” on the major momentum indicators–as circled on the charts. MACD, the longer termed momentum study, is showing very early signs of rising bars.
- Moneyflow indicators (top pane, bottom pane) are beginning a bounce.
- The VIX got very close to its “buy zone” last week. That chart is below.
- Sentimentrader.com’s “Smart/Dumb money index” was within a fraction of the “buy” zone last week. Dumb money is 46% confident in a bull market- smart money is 63% confident . This differs greatly from the pre-correction (July) levels of 70% confidence by the dummies vs. less than 30% confidence by the smart money! Follow the smart money.
- Seasonally, the second half of October can often be positive – moreover the 4th quarter of the second -year of a President’s term can also bring the beginning of a new bull market leg
- Normally, I don’t talk about Fibonacci retracements. That’s because I apply little credence to them (I fail to see the logic of applying crowd behaviour to an obscure mathematical measurement). Having said that, Fib. fans will note that the peak of the S&P 500 to Wednesdays’s test of 1820 was 62% – the most significant of the Fib retracements, if you buy into such stuff.
As always, I’d like to see a 3-day followup after a potential bottom – so I’ll wait to see what today (Monday) brings before getting too excited. Futures are flat/bearish as I write this based on a lousy report from IBM, but a small downdraft is not going to be of too much concern. I’ll wait for a day or two more of upside before acting. I’d also like to note an observation that I and other traders have made over the years – which is that top reversals are often “pointy” and quick, while bottoms are often “jagged” and slower. In other words, if last Wednesday was the beginning of a bottom reversal, we will likely see a few tests or near-tests – or just sideways jagged markets – for a couple of weeks or so before the next leg of the bull market begins.
On a final note, I’d like to post a chart I showed at my MoneyShow presentation last week- above. It shows the relative significance of the current correction vs. 3 prior corrections during the last 5 years. Sometimes we lose perspective, and even forget that markets do correct once in a while – especially after a long run like we’ve had since early 2013. As I noted at the MoneyShow, those corrections, which seemed so significant at the time, had minimal impact on our portfolios when we look back. I’d suggest you view the current correction in the same light.
We’re looking to deploy the last of our cash in the coming days, assuming positive follow-through by the markets. You might want to consider doing the same.