The stock market is torturing everyone right now.
The week started off with the market torturing all the bears who were aggressively buying put options on Friday. The S&P 500 gained 70 points on Monday. And, as if that wasn’t enough, the index gapped another 10 points higher on Tuesday.
Then, once all the bears had been squeezed out of position, it was time for the market to torture the bulls.
The S&P 500 did that by dropping 70 points intraday on Tuesday. The market erased nearly all of Monday’s gains and left the bulls feeling like they had just spent an afternoon at a CIA waterboarding camp.
But here’s the thing… It is torturous market moves like we’ve seen over the past few sessions that make a bottom for the stock market. Let me explain…
Look at this 60-minute chart of the S&P 500…
Take a look at the setup we had in early February. If you remember back then, you’ll recall I started buying stocks on February 5, when the S&P was trading near the 2650 level. Technical indicators were deeply oversold and the Volatility Index (VIX) had flashed a buy signal. But there wasn’t any positive divergence on the MACD or RSI.
The oversold conditions did help the market rally for a day (or two). But it wasn’t sustainable. All the rally did was allow the technical indicators to come off of oversold conditions, get closer to neutral territory, and give the market some room to push even lower.
Then… on that final decline on February 9… we got the positive divergence necessary to fuel a more significant bounce.
Now look at the recent action. To me it looks quite similar to the early February setup that created the first bounce. Technical indicators were deeply oversold on Friday. And the VIX generated a buy signal on Monday when it closed back inside its Bollinger Bands.
But there wasn’t any positive divergence to help support Monday’s rally. So, just as the early February bounce attempt failed, Monday’s bounce was short-lived as well.
Now, though, at least we have the chance for a better bottoming setup on the chart. Monday’s rally helped relieve the oversold conditions on the MACD and RSI technical indicators. It brought them back up to neutral territory. Now, if the S&P falls and drops to a lower low – like something around 2575-ish – then we’ll almost certainly get positive divergence on the technical indicators.
That sort of action would help fuel a more significant rally – perhaps something similar to what happened after the February bottom.
It doesn’t have to play out this way, of course. The market might find a new way to torture its participants. But it’s worth paying attention to this 60-minute S&P chart.
If the bottom of this current decline forms like the February decline, then the rally off of the bottom could be quite similar to the 200-point gain the S&P enjoyed in February’s second half.
Best regards and good trading,
Jeff Clark
P.S. For a majority of investors, this torturous action in the broad market has been nothing but frustrating. But for my Delta Report readers, it’s exciting.
That’s because we know how to capitalize on overextended market moves, week after week, with our option trades.
To learn more about how we do this, and why this April could be one of our best months so far this year, click here.
Reader Mailbag
Today, another mixed, positive batch of feedback…
I’ve been a subscriber of your service going back several years since your original publisher because I wanted both investment advice and trading advice. I’m very glad that I became a lifetime subscriber on your trading service after you went solo. I’ve studied technicals for many years and love to see how group psychology plays out in the charts.
The recent bottoming of the SPY (at least for now) proves the point. I drew a trend line over a year ago, connecting the low on 2/11/16 and the low on 11/4/16. And look what SPY bounced off of twice so far this year. Add in the 200-day moving average which also is very nearly the same levels and there was a VERY high probability of a bounce. And after reading your Monday morning commentary then seeing the market head lower right away I bought a whole bunch of SSO at pretty close to yesterday’s low with a plan to sell as the market heads toward resistance. The blue line goes all the way back to the beginning (March 2009) and connects three lows. When that line is broken it’s because all hell has broken loose and time to head to the bunker.
You make me a better trader. Your insight into technicals (groupthink) helps me to see the market dynamics more clearly. I also love that you give us insight into the various indicators you use. I’ve subscribed to a few other services that only give trade ideas (many wrong) without telling me why. Your explanations allow me to learn your methods so I can become a better trader on my own. But that doesn’t mean that I’ll ever stop reading your emails. Keep up the great work.
– Mike
Being an active technical trader, our opinions often agree. I do like that – another bit of confirmation.
Keep doing what you do, in my honest opinion you’re very good at it. Can’t please everyone. Love the Market Minute! Thanks ever so much.
– Dennis
Hey Jeff, I love your work and feel you are spot-on. I’ve traded long enough to get your prognostications and I appreciate your skill in reading where the markets are headed. Again, thanks.
– Tim
Jeff, how can people complain about a free newsletter? I appreciate your insights. I don’t rely on them as a sole source of guidance, but I do put considerable weight on your analysis. I used to be a subscriber to your service when you were with your previous publisher, and was sorry to see you go. I should have accepted your offer for a free trial to your Delta Report when you first launched that publication, but I didn’t then (and still don’t) think I can afford that so I was reluctant to take advantage of your offer back then because I knew it was unlikely that I would feel I could continue to subscribe. I wish you had a less expensive service, but I respect whatever you choose as a business model.
Anyway, my point in writing is that I want to thank you for your free Market Minute emails. I know it’s a form of advertising (I’d buy based on what I’ve read if Delta Report wasn’t as expensive as it is), and it is a good way to demonstrate your expertise (generally, you have been pretty much on target) while giving us small investors some insight into the markets. Thank you for what you are doing as a public service. Best wishes.
– Paul
Getting your letters is one of the most rewarding parts of our day. Thanks to everyone for writing in with your experiences, comments, and questions.
And as always, keep them coming right here.