This Could Mean Support Ahead for Stocks

On June 14, I warned readers that the stock market was getting into dangerous territory.

Two days later, the S&P 500 (SPX) put in a top and started to sell off.

The market ended up selling off by almost 3% in just six trading sessions. But now, it looks like SPX has found a bottom and is getting ready to take off once again.

Investor sentiment has certainly reached bullish extremes. In fact, the Nasdaq is about to close out its best first half to the year in 40 years.

Whether this means the broader stock market is ready to advance to new all-time highs is up for debate. But in the short-term, my analysis tells me that we should be expecting at least a new high above the June 16 closing price of 4452.

I’ve prepared an updated chart of SPX below so we can go through it together.

There are a couple of important things going on with this chart.

First, we can see how the SPX reached overbought conditions on the Relative Strength Index (RSI) on June 14. This was the first clue that a top was at hand.

But an overbought market doesn’t always mean it’s over. There needs to be more supporting evidence before being confident that a market reversal is coming soon.

That’s where the moving average (MA) on the chart comes into play. The 20-period MA is a great short-term trend indicator.

When a market starts trading further and further away from the 20-MA while registering overbought conditions in the RSI, it immediately has my attention.

It likely means that the market is reaching extreme conditions that aren’t sustainable for much longer. What happens next is what traders call “mean reversion.” This is when the market pulls back to important moving averages such as the 20-period.

We can see how this played out in almost picture-perfect fashion on June 28. The market got right down to the 20-MA and then bounced sharply.

Here’s the chart again below:

This likely means the pullback completed on June 28, opening the door to higher prices. My short-term target is 4512, which coincides with a swing point from April 21, 2022.

While there certainly is more bullish potential, my analysis is telling me it’s time to start getting more cautious as the market breaks higher and higher.

As Jeff and I have both said in the past, it’s likely the bear still needs to take one more vicious swipe at this market.

Therefore, the best approach is likely to take this market one step at a time. And for now, the next step is likely an attempt at testing 4512 in the SPX.

Happy trading.

Imre Gams

Are you prepared for a rally?

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