As of Friday, July 27, the market and the S&P 500 have been undergoing a correction. The S&P 500 is now at 1458 and many technical indicators are flashing very oversold conditions:
- Only 18% of S&P 500 stocks are above their 50 day moving average.
- Only 47.8% of S&P 500 stocks are above their 200 day moving average.
- The 10 day Moving Average of the Put-Call Ratio is at 1.12 (above 1.0)
- The ratio of new highs to new lows on the S&P 500 is only 7.4%
The closest support level is the 200 day moving average at 1448, then horizontal resistance of 1440. The 200 day moving average would be a reasonable bottom target (since we are in very oversold conditions), and this target could be reached intraday. The $SPX should have a bounce (using Fibonacci Retracements) to the 38.2% or 50% retracement which would be somewhere between 1489 and 1501 on the $SPX.
Usually, V shaped bottoms don't last. I expect the $SPX to re-test the previous lows (expected to be at the 200 day MA of 1448).
During the re-test, we can then determine whether the $SPX will continue another leg down (for the next leg in a larger ABC Correction), or, the $SPX may form a double bottom.
We can then come up with a new scenario at that point.
For Today's Chart with Info Above
Trading Advice if Above Scenario is True:
If the above scenario works out, a trader could:
- Cover all shorts now.
- Get ready to go long on the S&P 500. This could occur very quickly and occur intraday.
- Be prepared to play the bounce to 1489 to 1501 then sell the long position, and go short on the S&P 500.
- Cover the short once the $SPX re-tests the previous lows.
If one is more of an investor with a longer time frame (multiple years):
- Cover all shorts now.
- Create a wish list of stocks to go long, and get ready to buy in the very near future (even on Monday!)
- Start a 25% position on selected stocks.
- After the bounce, look for the re-test. If the $SPX re-test is successful, you can add another 25-50% position on your favored stocks. But watch out if there is another leg down! The $SPX could fail on the re-test.
Jim Cramer's thoughts on Bottom
Jim Cramer in this article, talks about the bottom. One of his indicators is a proprietary S&P 500 indicator that is at -6.5, an extreme reading which has only occurred twice in seven years. He says that the bottom usually occurs within 48 hours.
But even if we do get a bounce, beware of the re-test back to the previous lows. We'll determine what to do after the re-test of the lows.
Otherwise, watch out below. Next support levels on $SPX are 1420, 1410, 1380.
WARNING: You can lose money in the stock market. Please do your due diligence.