This has been a tough month for the stock market.
As of Wednesday’s closing price, the S&P 500 was down more than 4% for September. The Russell 2000 has been hit with a 4.5% decline. And the Nasdaq Composite Index has fallen 5%.
Unsurprisingly, lots of investors are nervous heading into the end of the month. And the aggressive folks are talking about making big bets on the short side.
But the market is setting up for a bounce…
Now, I can’t tell you if the bounce is going to be a multi-week move that rallies all the indexes several hundred points and gets everyone talking about a “new bull market.”
It might just be one of those “one-day wonder” rallies that crushes the folks who got a little too aggressive with short sales.
But we’re definitely setting up for a bounce.
Take a look at the McClellan Oscillators for the NYSE and the Nasdaq (NYMO and NAMO)…
These are momentum-based indicators that help determine overbought and oversold conditions.
Readings of more than 60 indicate severely overbought conditions and often precede large declines in the markets. Readings of less than -60 express extremely oversold conditions and usually lead to strong bounces in stock prices.
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Both indicators closed in extremely oversold territory on Wednesday.
This is the fifth time in the past year that both the NYMO and the NAMO have been below -60 at the same time.
Now, 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 three cases, the S&P 500 was sharply higher within just a few days of the oscillators dropping into extremely oversold territory.
My analysis indicates that we’ll see something similar happen this time as well…
Traders should take advantage of the situation and buy stocks into any weakness over the next day or two, in anticipation of a solid bounce in the days ahead.
Best regards and good trading,
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Jeff Clark
Reader Mailbag
In today’s mailbag, subscribers thank Jeff for sharing his options trading strategy…
Jeff, thank you so much! I enrolled in your 3-Stock Retirement Blueprint program a few weeks ago, and today I put it to work. I trade options daily and usually use SPX – but its potential profit was quite low today. So, I augmented my order with 100 put spread contracts on the highest return stocks of your three suggestions.
At market close – both the ETFs I had sold put spreads on – were up a total of $789 after costs. I’ll use this strategy on my day trades in the future. Thanks!
– Larry A.
Hi Jeff,
I’m spending the day today learning calls and puts. I hope to become a successful options trader. I chose to join with you. I believe you do care about helping the average person grow a successful portfolio over time.
You emphasize “lower risk” by teaching us the right way with options – not a fast payday every day. I’m with you, and I aim to succeed. I like your teaching style so far. I was a teacher for over 40 years. I’m anxious to keep going! Thanks for putting yourself out there for us.
– Cynthia T.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].