The stock market is oversold. In the short term, stocks are set up for a blistering bounce. But, if that bounce doesn’t get started by tomorrow, then the nine-and-a-half-year-old bull market is likely to end.

Let me explain…

As long as the S&P 500 is trading above its 20-month exponential moving average, then the bull market is intact. But, if the S&P 500 closes the month below its 20-month EMA, then the odds are quite high that stocks have reversed the long-term trend. The bull market has turned bearish. And investors should simply get out of the way.

Now… before we get too carried away with this thought, let me admit… I think we’re on the verge of a violent short-term rally. And, if it kicks off today and/or tomorrow, then the market can avoid triggering a bearish signal.

But, if stocks can’t hold up over the next two days, then even I’ll have to admit the bull is dead. And, while we still might get a solid year-end rally, the S&P 500 will be headed sharply lower over the next year.

Look at this long-term monthly chart of the S&P 500…

The 20-month EMA is the defining line between a bull and bear market. As long as the S&P 500 ends the month above the line, then the bull market is intact. We can look forward to the strong seasonal period for stocks from November through April.

But, if the S&P closes tomorrow below its 20-month EMA – currently at 2620 – then all bets are off. There’s a really good chance that the long-term bull market is over, and stocks are headed much lower in the months ahead.

The red circles on the chart show the periods in late 2000 and late 2007 when the S&P closed below its 20-month EMA. Both of those periods led to short-term bounces in the stock market that allowed investors to liquidate positions into strength just before the market turned sharply lower. So, even if we get a sell signal tomorrow, we’ll still likely get a short-term bounce off of oversold conditions that allows us to sell into strength.

In other words, we’re still likely to get a year-end rally no matter what happens in the next two days.

But, if the S&P closes below its 20-month EMA tomorrow, then investors are probably better off selling into strength over the next few weeks than buying into weakness.

Let’s see where we stand by tomorrow afternoon.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, readers give their take on investing in metals…

I am bullish on copper, gold, and lithium. Lithium, I think, is a longer hold. I think gold is also a good commodity to hold, and with the higher interest rates on the horizon, I think it could come up a bit as well. I am not an experienced investor, but I try to read about what is trending and read what the experienced people are saying, then use my best judgment.

I liked your article about copper. I have some shares of NAK (Northern Dynasty Minerals). They are just penny stocks, but I figure a little bit to start out is better than nothing. Thank you and I will be watching for more articles.

– Bill

Copper is due to walk on an upward trajectory. Instead of buying a stock specializing in copper mines, the safer bet is to scan and buy CPER (U.S. Copper Index Fund) or COPX (The Global X Copper Miners ETF). Enjoy the ride.

– Rakesh

And another reader responds to Friday’s Market Minute…

Hi Jeff. Your suggestion to “Find a stock that just can’t seem to get off the mat. Find a stock that nobody likes… a stock that if you mention it at a cocktail party, you end up drinking alone […] and hold it for a few months”…

Well, I bought Ford Motor Company. Wish me luck.

I look forward to reading your emails. Thank you for the informative articles and sharing your experiences.

– Chuck

What’s your “drinking alone” holding? Will it survive the potential bear market?

As always, send in your thoughts, stories, and questions to feedback@jeffclarktrader.com