Here’s what to look for in the action today…

General Trends

Welcome to the worst six months of the year for the stock market.

The bears wasted no time yesterday reminding investors the reason “sell in May and go away” is a cliché on Wall Street. A modest decline in the overnight futures market quickly turned into an aggressive selloff that pushed the S&P 500 below the support of both its 9-day exponential moving average (2387) and its 50-day moving average (2369). The index closed at 2357 – down 43 points, or 1.8%. The move wiped out a month’s worth of gains in just one day.

There’s no doubt the momentum has shifted to bearish. Stock prices will likely be lower in the weeks and months ahead.

But it won’t be a straight shot lower. Just as stock prices had been slowly grinding higher for the past three months, we’re likely to get a slow grind lower – just perhaps with a bit more volatility.

We’ll get big down days like yesterday – that quickly generate oversold conditions. Then we’ll get the inevitable snapback rallies that punish traders who held onto short positions too long, or who chased short positions into oversold conditions. Then, just as it looks as though the momentum is shifting back to bullish, we’ll get another big down day.

Traders who aren’t prepared for it, and who don’t follow various technical indicators, will get chopped up by the action. Traders who plan ahead, and who wait for extreme conditions in the indicators before taking on new positions, stand to profit.

Stocks

The S&P 500 is trading below its 9-day EMA (2387) and its 50-day MA (2369). Those are now resistance levels on any bounce attempt.

The index is now oversold, having closed below its lower Bollinger Band. So we should see an attempt at an oversold bounce soon. I’m writing this late on Wednesday night, and the S&P 500 futures are up about eight points. So, maybe we’ll get a bounce on Thursday’s opening.

If the bounce is strong enough to push the S&P back above its 50-day MA, then it’s possible the index could recoup a large chunk of yesterday’s decline and get all the way back up to the next resistance level at 2387.

Normally, after a day like yesterday – which clearly has shifted the momentum from bullish to bearish – I’d be less optimistic about the possibility of a strong bounce attempt. But, yesterday’s action in the Volatility Index (VIX) suggests we could see a bounce that lasts several days.

The VIX

Take a look at this chart of the VIX plotted along with its Bollinger Bands…

Bollinger Bands indicate the most likely trading range for a stock or an index. Whenever a chart pushes outside of the bands, it indicates an extreme condition – one that is likely to reverse.

The blue circles show each time over the past year the VIX closed above its upper Bollinger Band and then dropped back below it – thereby generating a broad stock market “buy” signal.

Now, look at how the S&P 500 performed following each of those “buy” signals…

In every case, the VIX buy signal marked at least a short-term low for the broad stock market. The S&P then rallied anywhere from a few days to several weeks.

As I mentioned, the VIX closed above its upper Bollinger Band yesterday. If it drops back inside the bands today, then we’ll have a buy signal. And we’ll likely get several days of modest upside action in the broad stock market.

So don’t be too anxious to pile into a bunch of short trades here. We should get a better chance to do so, at higher prices, over the next week or two.

Gold and Gold Stocks

I’m disappointed by the action in the gold sector yesterday. Gold rallied over $1,260 per ounce. Yet the VanEck Vectors Gold Miners Fund (GDX) only posted a modest gain. I would have expected stronger action – especially as a defensive trade for a broad stock market selloff.

If the market starts to bounce here, as it seems set to do, then we may see some short-term weakness in the gold sector.

I plan to use that weakness to add some additional exposure to gold stocks.

I’ll update Delta Report readers on these trends throughout the day on Jeff Clark Direct.

Best regards and good trading,

Jeff Clark

Mailbag

Jeff's note: I always love to hear from my readers. Feel free to send any questions, concerns, or great trading stories to me right here.

Today, a nice piece of feedback on the “Mom gauge” and the Market Minute

Jeff,

Keep up the good work, I appreciate your feel for the market and that you wait for fat pitches before making recommendations. I also appreciate that you provide “not for Mom” or “okay for Mom” categorizations. Additionally, I find it very helpful when you provide the S&P futures status in your morning updates because it helps provide context to your thoughts, (you don't always provide that information in your morning updates).  Brian D.