After falling for six straight days, the S&P 500 now looks poised for a short-term bounce.

The selloff on Friday morning may have marked a short-term low for the market. The S&P dipped as low as 2864. And, for the first time in a week, the 15-minute chart of the index showed positive divergence.

Take a look at this updated chart I first showed you on Friday…

As the S&P 500 made a lower low Friday morning, the MACD and RSI momentum indicators both made higher lows. This sort of “positive divergence” is often an early warning sign of a potential reversal.

You’ll recall that when we looked at this chart on Friday, there were no signs of positive divergence. The index and the indicators were hitting lower lows together. That changed when the stock market opened lower Friday morning. So, now we have to be open to the potential for at least a short-term bounce in the market.

Adding to this potential is the daily CBOE Put/Call ratio, which closed higher on Friday. Take a look…

This chart shows the total volume of put options traded divided by the total number of call options. It’s best used as a contrary indicator. In other words, when there’s a lot more volume in call options, investor sentiment is too bullish. From a contrary standpoint, that’s a bearish indicator.

On the other hand, when there’s a lot more volume in put options – signaling traders are getting scared – that tends to be a bullish indicator.

On Friday, the CPC jumped to 1.17 – meaning there was a lot more volume in put options than in calls. That’s nearing the level which often coincides with at least a short-term low in the stock market.

This doesn’t mean we’re out of the woods and the S&P 500 is headed back to new all-time highs right away. In fact, I think the next rally is likely to form a lower high on the daily chart and turn back down again (for reasons I’ll address at some point in the future).

But, we could certainly see a brief two- or three-day bounce in stock prices. And that bounce might bring the 2900 level back into play.

So, aggressive traders might consider buying into any short term weakness today. Just don’t plan on staying too long in the position.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, a frequent reader lends their thoughts on gold…

I was hard on you about your bullish call on gold a couple of months ago. I knew you were a little early. Well guess what? The commercial boys – the smart money – are just now getting very bullish on silver and gold. The dumb money and the hedge funds have never been so bearish. Guess what? It’s time to buy silver and gold and get ready for a ride up.

– Mike

Are you prepared to ride gold higher?

Let us know, along with any other trading questions or stories, right here.