It has been just over one month since the stock market broke down from its parabolic pattern and entered a correction phase. During that time, we’ve seen a gut-twisting selloff followed by a huge bounce off the bottom, followed by a whole lot of choppy, back-and-forth action.

Over the past week, the stock market has frustrated bulls and bears alike with crazy changes of direction. We’ve seen the S&P 500 start the day with a big opening rally, only to watch it come back down and close in the red. We’ve seen big opening losses reverse course and lead to large last-hour rallies.

It’s confusing action. Traders don’t trust the moves. And it’s hard to make a confident bet on the intermediate-term direction.

In times like this, traders should look at the moving averages for clues.

A moving average is simply a line that illustrates the average price of a stock over a specified timeframe. For example, the 50-day moving average (MA) is the average price of a stock over the past 50 days. The 50-day MA is often viewed as an intermediate support or resistance level. If a stock is trading above its 50-day MA, then it’s in an intermediate-term bullish trend. If the stock is trading below the 50-day MA, then the trend is bearish.

For short-term periods, I like to use the 9-day exponential moving average (EMA) and the 20-day EMA.

All of these moving averages are useful in helping determine a stock’s trend over various timeframes. The real value, though, is when all of these averages line up and move in the same direction. That’s when you can have confidence that a trend is intact.

For example, take a look at this chart of the S&P 500 along with its 50-day MA (blue line), 20-day EMA (green line), and 9-day EMA (red line)…

For most of the past year, the moving averages have been in a bullish configuration. They were moving higher and they were bullishly stacked – with the 9-day EMA above the 20-day EMA, which was above the 50-day MA. That’s what happens in an uptrend. So, traders can look at the moving average configuration and be confident in their bullish bets.

Of course, the stock market doesn’t always make it so easy. In April and in August last year, the moving averages came together. They weren’t stacked on top of each other. And that was a warning sign that the intermediate-term trend for the stock market might be changing.

It didn’t happen. Instead, the moving averages turned back up. They stacked on top of each other again. And we got this tremendous rally that lasted until the end of January.

Now, however, we’re looking at a different situation. The moving averages have shifted to a bearish configuration. They’re bearishly stacked – with the 9-day EMA at the bottom, the 20-day EMA on top of it, and the 50-day MA above them both.

This tells us the intermediate-term trend – meaning the next several weeks – is now bearish.

Anything can happen in the short term, of course. But with the moving averages in a bearish configuration, the odds favor more downside action in the weeks ahead.

So, I continue to look for the S&P 500 to retest its 2581 closing low – maybe even dip a little below it – before the current correction phase is over.

Best regards and good trading,

Jeff Clark

P.S. In this highly unpredictable period of stock action, traders are looking for a way to post gains without having to rely on the broad market. That’s why I’m sending out a conservative trade to my subscribers in just a few hours – something where the reward greatly outweighs the risk, and has the potential to lock in a nice return over the next few weeks.

These are the kinds of trades my Delta Report subscribers have gotten used to getting… no matter which direction the market heads. To learn how you can join them, and start receiving my weekly trade recommendations every Tuesday, click here.

Reader Mailbag

Yesterday, we got one of the fullest mailbags we’ve ever seen…

Jeff, I am a new and enthusiastic subscriber to Delta Report. I subscribed because I remember your exceptional accuracy/return rate from your days affiliated with your previous publisher. Thanks for “reappearing.” Best regards,

– Fred

 

I just want to thank you for your knowledge of the market and for your concern for each of us as traders. I’ve been with you for a long time; and I appreciate your work so much! Thanks again! You’re great!

– George

 

I’d just like to say that I totally appreciate your view and recommendations. I paid the money to your previous publisher when you were there primarily for your work. And now I’ve followed you here as well. I’m not the least bit frustrated with your approach to the markets. I love the technical analysis and your outlook of being mostly cautious and wise but also speculative when the opportunity is there. I appreciate the value of your work and hope you keep it up! Thank you!

– Lance

 

Jeff, Thank you yet again for your guidance. I took some of your option trades as recommended (DDD, GE. GDX & SPY) and yes, I often read between the lines or take the aggressive side (not suitable for Mom trades).

In addition I put these on a watch list for opportunities, and this week I took stock positions as they seemed to find support (GE at $14, for example). While I am keeping the options positions following your guidance, I was pretty short-term on the stock trades, getting out yesterday. As a result, I was able to take significant profits this week. My confidence to do this is due in large part to your very educational posts. You do so much more than just make recommendations, you also are a tremendous educator. Thank you.

– Bill

 

Dear Jeff, I would like to thank you for not only making money on most of your recommendations, but also for growing as a trader. I learned a lot, and keep learning.

It is interesting that I started trading based on your general guidance, feeling I could make more money engineering my own trades. Then I noticed that I would make more money following your recommendations in the blog exactly. But I also was learning, and using your education section.

Very much appreciate the service. I wish the negative nattering comments could be eliminated, just to keep you happy and in optimum frame of mind. There is enough stress in the market itself.

– Kirill

Also, two comments on Monday’s essay, “Gold’s Decline Is Temporary”…

Not hard to understand the manipulation with the number of short contracts placed.

– Bernard

 

Don’t you think that you should add a manipulation indicator into your arsenal of technical analysis?

– Charles

Thank you, as always, for your thoughts, questions, and stories. Keep them coming right here.

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