How I Deal With Fear in the Markets

On July 31, I suggested that stocks were running out of steam.

This wasn’t a popular take at the time…

The S&P 500 had just climbed over 20% between March 13 and July 27. Many traders thought the rally would continue.

Market Minute readers, however, were prepared for the volatility.

Since that update, stocks have fallen over 9%. That’s against a backdrop of renewed fears that interest rates will stay higher for longer than originally anticipated.

U.S. 10-year yields are now trading at levels not seen since 2007. The S&P 500, on the other hand, is trading back where it was in May 2022.

There’s a lot of fear in the market right now. And it seems that everyone is getting increasingly bearish.

This is a common occurrence any time the market is getting ready to turn.

At market tops, there’ll be no signs of fear and doubt. Almost everyone will tell you things can only keep going up. It’s the opposite during selloffs. Investors will tell you things can only keep getting worse.

The market is most likely to turn when sentiment reaches either a positive or negative extreme. While there are many ways to assess sentiment, my favorite method is looking at a price chart.

And right now, my analysis is that the stock market is very close to finding strong support.

I’ve prepared an updated chart of the S&P 500 with key technical elements traders should look out for.

These include the powerful 200-period moving average (MA), a key support level, and oversold conditions in the Relative Strength Index (RSI).

You can check out the chart below.

It’s not often you have so many pieces of bullish evidence all lining up at the same time.

The 200-MA is a great indicator for identifying bigger-picture key levels. You can see on the chart how the market reacted to the 200-MA back in March.

At the time, the market broke below the 200-MA for just a couple of days. Then the market popped right back up. It didn’t look back until putting in a top on July 27, rallying around 17% in the process.

And it just so happens that the 200-MA lines up almost perfectly with an important support level at 4179.75. This level was previously resistance back in April and May. You can see on the chart how the market took several days to finally break through that resistance.

Now that the market is coming back down, that broken resistance level should offer some support.

Finally, we have the Relative Strength Index (RSI), one of my favorite momentum indicators. As of writing, the RSI was flashing a reading around 28. Such a reading is considered oversold. It’s important to point out that, on its own, an oversold reading isn’t enough for a clear picture.

That’s why it’s so important to combine the RSI with other analytical tools like moving averages and key levels.

If the market is going to bottom out, we should find out soon considering how close we are to all this technical support. In that case, I expect a rally to take the market back to at least 4500.

On the other hand, if we cut right through all this support, it means the bears aren’t done with this market quite yet. And I see the market dropping down near 4000.

Happy trading.

Imre Gams

Are you watching for the market to bottom out?

Let us know your thoughts – and any questions you have – at [email protected].