The stock market is now set up for a nice, solid, three- or four-day bounce.
On Friday, we noted the potential for a Volatility Index (VIX) buy signal. That hasn’t happened yet. The VIX closed above its upper Bollinger Band again on Friday – making it three days in a row. It’s rare for that to happen on four straight days. So, I’m buying stocks this morning in anticipation of a VIX buy signal this afternoon.
But, the VIX isn’t the only indicator that’s telling us a bounce is near.
The McClellan Oscillators (NAMO and NYMO) have also dipped into oversold territory. They’re at levels that often mark short-term bottoms for the stock market.
Here are the charts…
Both the NYMO and the NAMO closed below their lower Bollinger Bands on Friday. That condition often occurs at or within a day or two of a short-term bottom for the S&P 500.
The term “short-term” is really important here. Oftentimes, the first rally off of this condition only lasts a few days. Then the oscillators, and the stock market, roll over and head back down again.
That’s what happened in mid-May, the last time the oscillators looked the way they do now. The stock market enjoyed a blistering four-day bounce, where the S&P gained 80 points. Then it rolled over and dropped to a lower low before establishing a more significant bottom.
That’s the same type of scenario I’m looking for this week.
Conditions are oversold enough to fuel a strong bounce in stocks that lasts for a few days. But, this isn’t any longer the sort of market where traders can buy stocks and just leave them alone for several weeks or months.
This is a trader’s market. In order to profit, you have to be willing to get into a position and then get out of it just a few days later.
Think about the essays we’ve published here in Market Minute for the past few Mondays…
We came into July looking for a short-term rally, and using it to take profits. We got a VIX sell signal a few days later and we started off the next week looking for a decline. That decline lasted only a few days. Buyers stepped up and stocks started rallying again the next week.
But, as we got closer to the end of the month, conditions were overbought, and we prepared for another decline. Now, that decline has just about run its course. And, the market is setting up for a bounce.
Conditions are likely to look a lot different a week from now than they do today. But, that’s great. “Different” conditions are what allow us to trade. This is a rough environment for the “buy-and-hold” crowd. But, it’s a great environment for traders.
So, for this week at least, I’m buying. Next week will probably be a different story.
Best regards and good trading,
P.S. Like I said above, it’s a trader’s market right now. The typical investor’s buy-and-hold strategy just won’t work with current market conditions. Especially with what I see on the horizon…
In short, I see a market crash coming. Investors could lose it all. But traders – especially those who use my strategy – could make a fortune in the days and months leading up to it.
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