Last week was tough for the stock market. The S&P 500 lost 1%. The Nasdaq Composite Index fell almost 2%. And, the Russell 2000 was slammed with a nearly 6% decline.
Not surprisingly, lots of investors are nervous heading into this week. And, the aggressive folks are talking about making big bets on the short side.
But, it looks to me like 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 back to new all-time highs. Or maybe it will just be one of those “one-day-wonder” rallies that crushes the folks who got a little too aggressive with short sales.
But, we are definitely setting up for a bounce.
Take a look at the McClellan Oscillators for the NYSE (NYMO) and the Nasdaq (NAMO)…
These are momentum-based indicators that help determine overbought and oversold conditions.
Readings of more than 60 indicate severely overbought conditions and often preceded 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 of these indicators closed in extremely oversold territory on Friday. This is only the fourth time in the past year that both the NYMO and the NAMO have been below -60 at the same time.
Here’s how the S&P 500 (SPX) performed after the three previous times…
The oversold conditions didn’t always mark the exact bottom of the decline. But, in all three cases (the blue arrows), the S&P 500 was sharply higher within just a few days of the oscillators dropping into extremely oversold territory.
My guess is we’ll see something similar happen this time as well.
Traders should take advantage of the situation and buy stocks into any weakness early this week, in anticipation of a solid bounce in the days ahead.
Best regards and good trading,
Jeff Clark
P.S. This Thursday, I’m making the biggest prediction of my 40-year career… I see something coming to the markets that could wipe out your capital gains in the next few months…
It’s what I call a “zero-sum” market, where stocks chop back and forth for longer than you could imagine. It’ll be a nightmare for shareholders, but a paradise for traders.
To find out how you can prepare yourself, click here to sign up for my special presentation this Thursday at 8 p.m ET. I’ll even be giving away a free recommendation for all who attend. So make sure to reserve your seat today.
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