Last week was tough for the stock market. The S&P 500 lost 2.2%. The Nasdaq fell 3.5%. And, the Russell 2000 was slammed for more than a 4% decline.
That surprised a lot of folks.
The week of Thanksgiving is usually bullish for the stock market. And, the Volatility Index (VIX) had just generated a buy signal the week before. So, many investors were betting on a bullish move last week.
Of course, when so many folks are leaning in one direction, it often makes sense to go the other way. So, we were cautious. And, I explained why I wasn’t interested in trading the new VIX buy signal two weeks ago.
Now though, after a week of turbulence, it looks to me like the stock market is setting up for a bounce.
I can’t tell you if the bounce is going to be a multi-week move that rallies all the indexes back to new all-time highs… Or maybe it will just be one of those one-day wonder rallies that crushes the folks who got a little too aggressive with short sales.
But, we are definitely setting up for a bounce.
Take a look at the McClellan Oscillators for the NYSE and the Nasdaq…
These are momentum-based indicators that help determine overbought and oversold conditions.
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Readings of more than 60 indicate severely overbought conditions and often preceded large declines in the markets. Readings of less than -60 express extremely oversold conditions and usually lead to strong bounces in stock prices.
Both of these indicators closed in extremely oversold territory on Friday. This is only the fifth time in the past 13 months that both the NYMO and the NAMO have been below -60 at the same time.
Here’s how the S&P 500 performed after the four previous times…
The oversold conditions didn’t always mark the exact bottom of the decline. But, in all four cases, the S&P 500 was sharply higher within just a few days of the oscillators dropping into extremely oversold territory.
My guess is we’ll see something similar happen this time as well.
Traders should take advantage of the situation and buy stocks into any weakness early this week, in anticipation of a solid bounce in the days ahead.
Best regards and good trading,
Will you be buying into weakness this week? Are there any stocks on your radar?
Let us know your thoughts – and any questions you have – at [email protected].