We should be looking for bearish trades in the stock market…
At least that’s what my mechanical scoring system says.
On Monday, April 15, the S&P 500 (SPX) broke below two key moving averages on the daily timeframe.
These two moving averages are the 20- and 50-period. Together, they can give us important clues about the likely direction of the market.
Here’s a quick recap of how this scoring system works from when I first brought it to you:
The scorecard can have a maximum rating of +3 and a minimum rating of -3.
A +3 rating is ultra-bullish. +2 would be strongly bullish. +1 means the market is mildly bullish.
A score of 0, of course, would mean we are neutral.
And on the other side of the spectrum, -3 means we are ultra-bearish. -2 would be strongly bearish and -1 means the market is mildly bearish.
Right now, the market is giving us a score of -2.
That’s because the market is currently trading below both moving averages. If the slope of the moving averages were to turn negative, then we’d have a maximum bearish score of -3.
This a complete and total U-turn from the maximum bullish score of +3 we had at the beginning of the month.
You can check out an updated chart of the SPX with the 20- and 50-period moving averages below so you can see what I mean.
As you can see, the SPX has broken below both those moving averages.
But crucially, the slope of those averages remains neutral. At least for now…
If the market continues to break down hard, then we’ll get a score of -3. According to the system, that means traders should be playing the downside in the stock market.
Now, it’s important to note that just because we have a bearish score, it doesn’t mean that traders should rush into bearish bets immediately.
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As Jeff noted on Friday, the market is currently oversold and likely to have a short-term bounce.
So this could be the makings of a potentially great two-way trade. Aggressive traders could look to buy the market and if the bounce looks to be running out of steam, sell the market on its way back down.
Happy trading,
Imre Gams
Analyst, Market Minute