After several weeks, there’s finally a strong buy signal in the S&P 500 index (SPX).
The last time we had this kind of signal was in early March.
Back then, the SPX rallied over 8% before dropping to a low of 3810.32 and officially putting the index into bear market territory.
While it’s too early to say whether we’ve carved out a long-term bottom, the stage is now set for bulls to be back in the driver’s seat.
The buy signal I’m seeing now should guide this market higher at least over the next couple of months.
Let’s look at the SPX price chart to see what I mean…
On the chart, we have the Bollinger Bands (blue lines) which are one of my favorite tools to identify overextended market conditions.
The upper and lower bands contain most of a market’s price action… and prices tend to bounce off those outer bands.
I highlighted the last time the Bollinger Bands generated a buy signal in March.
This buy signal was triggered when prices pierced the lower band and then closed strongly back above it.
And this is the same type of signal we’re seeing now.
Prices pierced the lower band at the beginning of May and have recently closed back above it.
Take another look…
At the March buy signal, notice how prices went on to test the middle Bollinger Band after bouncing off the lower one.
This middle band proved to be resistance for the market and prices established fresh lows just below 4,000.
This typically happens when a market is trending.
You can see how in the run-up to the market’s top in September 2021, prices bounced lower off the upper band but found support on the middle band.
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If the market breaks through the middle band on this buy signal, it would be an initial sign that the market is putting in a long-term bottom.
The next step for the market to confirm the bottom would be for it to consistently tag the upper band while finding support on the middle band.
And this is what intermediate-term traders should wait for before playing the long side of the market once again.
On the other hand, short-term traders should look for opportunities to ride the market back to the middle Bollinger Band.
Which, as of writing, is just over a 4% move from current prices.
Happy trading,
Imre Gams
Analyst, Market Minute
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