I hope the stock market falls today. If it does, then we’ll have the conditions in place for a mid-December rally.

Let me explain…

First off, take a look at this daily chart of the S&P 500…

Remember, stock market corrections occur in three phases. There’s the initial decline. Then there’s the wicked bounce off of oversold conditions. Then there’s the final decline that retests the low, or makes a new low.

We went through that cycle earlier this year when the S&P dropped hard in early February, rallied straight up into mid-March, and then finally bottomed at a slightly lower low in early April.

The current correction isn’t following the exact same pattern. But, it’s similar.

And since all of the various technical indicators are trading well above their October lows, if the S&P 500 dips to a new low on this current move lower then we’ll have significant positive divergence. That’s a really good reason to buy into any sort of decline today.

I’ll also point out that on Friday, the S&P 500 closed almost 70 points below its 9-day exponential moving average (the squiggly red line). The index rarely moves more than 30 points away from the line before reversing course. So we have an extended, oversold condition.

I’m not bullish about the long-term or even the intermediate-term prospects for the stock market. The market is changing character and is likely shifting from bullish to bearish. But, I am bullish for the short term.

The proverbial rubber band is stretched far enough to the downside to fuel a strong “snap-back” rally. There’s positive divergence on the daily chart of the S&P 500. And we’re entering a seasonally strong period for stocks.

So, for the short term, it looks to me like we have a good setup for a mid-December rally. Traders should be looking to buy on any weakness today.

Best regards and good trading,

Jeff Clark

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