Friday’s action was a good start.
But the bulls aren’t out of the woods yet.
Conditions were oversold last week. And the market got even more oversold when it gapped lower following the non-farm payrolls report on Friday morning.
The S&P 500 even traded at a new low for this current decline phase.
But then buyers stepped up. The market reversed.
And the S&P 500 rallied more than 100 points intraday before pulling back slightly in the final hour.
Just like that, the bulls recaptured the short-term momentum.
There’s just one problem…
October bottoms usually occur with positive divergence. And as of Friday, the daily chart of the S&P 500 doesn’t show any divergence.
Take a look…
Notice how last October the S&P 500 made a lower low, but the technical momentum indicators at the bottom of the chart all made higher lows.
That sort of positive divergence often occurs at the end of a decline phase and leads to the start of an intermediate-term rally phase.
There also wasn’t any positive divergence at the low last week.
So, while conditions are oversold enough to support a short-term bounce, we don’t have the conditions yet for a sustainable multiweek rally through the end of the year.
In order to get that setup, the market needs to rally strongly enough to pull the indicators off the bottom. And that process likely started on Friday.
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Then, we need the market to dip lower again, and make a lower low, while the indicators remain above last week’s lows. That will create the same conditions as last October, where the S&P 500 rallied 600 points four months off the bottom.
A similar setup this time would have the S&P 500 make a lower low in the weeks ahead below 4218.
And, if the momentum indicators at the bottom of the chart can hold above last week’s lows, the action will create positive divergence. That will create an ideal setup for a year-end rally.
Best regards and good trading,
Jeff Clark
READER MAILBAG
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