The market has now entered the third leg of the correction phase. Traders should get ready to buy.

On Wednesday, we took a look at how typical stock market corrections play out in three legs. The market started its second leg on Monday with a very strong oversold bounce. We figured that leg still had a little more room to run to the upside – which happened on Wednesday.

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Yesterday, the market kicked off the third leg of this correction phase with a sharp move lower. There’s probably a bit more downside ahead. But, we’re nearing the end of this correction.

Here’s an updated look at the S&P 500 chart I showed you on Wednesday…

In typical fashion, the second leg – the oversold bounce – rallied the S&P 500 all the way back up to its 9-day exponential moving average (EMA) line. That’s where the index met resistance and the market started its third leg – a move lower to retest, or dip a bit below – the low of the first leg.

So, the S&P should be headed back down towards 2950. And, yesterday was a good step in that direction.

When the market gets to that level, traders should then take a look at some of the technical indicators we typically follow – like the McClellan Oscillators, the Volatility Index, and the Bullish Percent Indexes – for signs of oversold conditions. We should also look for positive divergence on some of the momentum indicators – like the MACD, and RSI.

Those indicators will tell us when the decline is nearing an end, and when it’s just about time to buy.

Put your plan together today. Because when the market does finally fall to the point where it’s time to buy, it’s going to feel like the last thing you want to do.

Having a plan ahead of time will help you set the emotions aside and take advantage of the buying opportunity.

Best regards and good trading,

Jeff Clark

Reader Mailbag

Today we hear from several Jeff Clark Trader members about their gains from Jeff’s most recent trade…

Thank you so much, Jeff! I sold my position for more than a 400% gain!

– Deborah

Hi Jeff, I recently signed up for your service… and on my first options trade with your service, I made over a 360% return on my put options. Your advice was spot on. Looking forward to more great advice!

– Brad

Hi Jeff, I closed out on your recent puts for a 627% gain! This made up for the loss on trading the stock the first time around. I’m waiting for another big gain, keep them coming.

– Thomas

And some kind words from a Delta Report subscriber…

Hello Jeff, I’ve been following your updates since the beginning of this year, and I’ve enjoyed all of your daily updates, as I’ve learned a lot from how one can see the market – as well as your trade recommendations.

I’ve now decided to follow and start entering your option buys of the calls and puts going forward. Best regards and please keep up the great work as I look forward to continuing learning from you.

– Ming

Finally, we end with a dissenting opinion from Delta Report member Tim…

Jeff, per your Market Minute on Monday, I disagree in part with your thesis. First, I do agree that the incredible 74-point rally in the S&P 500 in the last 15 minutes of last Friday did spare stocks from a bad technical outlook and further selling on Monday. The average American has no idea how dire this week looked at 3:15 to 3:30 that day before things reversed higher.

Where I disagree is your point that when the index falls below its 20-month EMA, it’s been a bear market. Even though this has happened four times since the 2008 meltdown: 2010, 2011, 2015 and before Christmas 2018. The 2015 to early 2016 market was nearly a bear, but all four occasions witnessed a rally after.

So, even if market indexes fall another leg lower and cause more “technical damage,” the stock market can still recover so long as we avoid the standard 20% or so decline – keeping in mind SPX did fall just shy of 20% in December 2018 before ending a year of volatility with a new year (2019) of low volatility.

Regardless, I like you showing the chart and the danger we approached. The four times we avoided a bear market since 2008 are not times I wish to repeat. That said, it seems folks I
speak to who know market history are expecting another leg down soon, and I don’t see how the Fed or other central banks’ monetary policies can sufficiently offset supply shock and demand declines to avoid more panic selling in the days and weeks ahead.

– Tim

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].

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