In early June, the S&P 500 had broken its downtrend and broken out from a base with a neckline near 4200. That’s bullish. I believe the current correction is a normal pullback after that base breakout. See my Online Trading Course to learn more about this type of pattern. So… Where is the market now, and what might be the timing on a buying opportunity?
“Every storm runs out of rain just like every dark night turns into day.”– Shannon L. Alder, author
Prior to this very much expected and very normal correction, I gave you guys a heads up in several blogs that I expected a pullback. In fact, this correction was discussed in mid July during my “Riding the markets” video with Brooke Thackray. I was also on BNN on August 1st (the day before the correction began!) where I emphasized that potential once again. So don’t say I didn’t warn you!
So, where might this correction land? I’ve noted on a few blogs, plus the ValueTrend Update Newsletter, that my technical target is for the SPX to land around 4200-4300. As I write this blog, the SPX is toying with the mid 4300’s, which is first support – my chart below doesn’t show this as its a day old. You can see these horizontal support/ resistance lines on the chart below. Today, I want to talk about when we expect will be the opportune time to deploy the cash we’ve been holding in our Equity Platforms. Keep in mind that the actual DATE of a market opportunity is less important than the PRICE. The chart rules, not the calendar! As such, I’m looking for a sign of support anywhere in that zone below, and will then begin legging back into the market. When that happens is less material. Still, its interesting to surmise on that timing.
Here’s a seasonality bar chart for September going back to 1928.
BearTraps: “Since 1985, what are September – October equity market returns with front-end rates at 5% or more? A lot worse than the data above.”
Great song by Greenday (link embedded in image below). Appropriate message for todays market, perhaps….
Sentiment influenced my call for a correction
Below is the AAII Bull/Bear ratio. Its often a leading indicator for both opportunities and caution signals. But when a sell signal ( in this case, too many bulls) coincides with other indicators (aka poor breadth, overbought markets, seasonality, and other sentiment indicators), you get a higher chance of a neartermed pullback. And that’s what I’ve been hammering on for the past couple of months.
On the positive side…
While the SPX looks to have first support at around 4300 being tested as I write, that point of support (as seen on the top chart) is not such a significant level. As such, there’s a decent chance of a bounce off of that possibly next week, but then a further leg down to 4200. Not a prediction, just a potential – although I will admit I think its probable. We shall see.
On the positive side, because the DJIA index is NOT chock-full of overpriced tech stocks, there’s a good chance that current support near 34,300 will be held. Unfortunately, it is penetrating the 50 day SMA as I write this, which might indicate a potential for a breach of support (34,300-ish) if that condition remains too long.
Whatever the case, the index is worth watching. If it can hold support or close to it, its likely the correction will be a short one for the broader markets (x-tech, which may march to its own drum). However, if the DJIA breaks significantly, we’ll probably see another 1000 points before next support is held.
Final thought: Note that the MFI indicator (something I have been using more and more lately). Basically, this indicator combines a traditional moneyflow calculation (positive volume vs negative volume plotted cumulatively), then turns it into an RSI indicator. Its actually pretty good at finding turning points. The indicator hit an overbought sell signal in late July. Now its in a zone where it suggests less risk, albeit not an outright buy zone. The bulls out there might take that as evidence for the market to bounce from here. I’m not in that camp, but never say never. No matter…Should the Dow sell off further, it would push MFI into a legitimate buy signal. So, the positive news is that even if the Dow breaks support, we may see an oversold MFI signal indicating a buying opportunity