We’re back with another video edition of Market Minute. Feedback on these videos has been largely positive, so I’ll continue using this format weekly. (Feel free to let me know your thoughts, good or bad, right here.)

Amidst the market “crash” on Monday, some may have been frustrated about missed opportunities… or concerned about what to do next.

That’s why I wanted to sit you down and tell you that the best opportunities aren’t behind us. I’ll tell you how to be prepared to take advantage of the new market environment today.

You can watch your video edition of Market Minute below, or scroll down to read the transcript.

Transcript

Hi folks. Welcome back to another video version of the Market Minute. I guess I chose the wrong week to go on vacation. I was lamenting that fact last night over dinner, and my two sons pointed out that it seems like every time we go on vacation, the market does very odd things. Or is especially volatile.

And we’ve certainly seen that this week with that large drop on Monday, the big rebound on Tuesday, then the sell off at the end of it all, and the entire time I was thinking… “Gosh, I am missing opportunities here to trade.”

But as my sons correctly pointed out, the markets always offer opportunities to trade and on any given day, you’re going to miss thousands upon thousands of opportunities.

The great thing about the stock market, though, is the very next day, it offers thousands upon thousands more opportunities to trade.

Don’t Regret Missed Opportunities

So you can’t get caught up or get upset over the fact that you might be on vacation while the market is crashing around the world, or rebounding, as the case may be. And you can’t get upset.

You know the brokerage firm I work with? Their website went down, which I understand. There are an awful lot of them that did go down during the hijinks on Monday. So in any case, my point is that whatever happened yesterday or the day before is nothing. The opportunities to trade are infinite.

Whatever you might have missed earlier this week, you’ll have an opportunity to make up for in the days and weeks and months ahead. So don’t get upset if you missed the chance to buy on Monday morning.

For reasons that I’ll explain in a moment, you’ll probably have an opportunity to buy at those levels once again. Or if you miss the opportunity to sell back in early July, you’ll probably have an opportunity to sell it at favorable prices.

Once again, the market again offers so many opportunities to trade, and that’s one of the great things about this particular business – every day you have new adventures, every day you have new opportunities.

And again, whatever you might have missed earlier this week, you’ll have the chance to make up for later on. Let’s talk a little bit about the stock market.

A Positive Divergence Ahead

So we peaked at 5650 or so on the S&P 500. We corrected about 10% of that at the lows on Monday. We were 5120, I think that was below what we hit that day. I suspect that probably in the days ahead will come back and retest that low. In fact, I think that would be a healthy thing to do.

What you don’t want to see is some immediate rebound where stocks just all of a sudden start taking off again. That would be relatively unhealthy, I think, because it doesn’t create the sort of base from which a sustainable rally occurs. The favorable view, or what I expect will happen, is the market will come back down, will retest, maybe even take out Monday’s low.

In fact, I wouldn’t be disappointed if we saw the S&P 500 test around the 5,000 level. And at that point, hopefully, the intraday charts will show some positive divergence on the technical indicators that we follow: things like the MACD, the Relative Strength Index (RSI), the Consumer Confidence Index (CCI).

All of those things are what we pointed to many, many times before if we see the market making a new low. So while all of those indicators are making higher lows, that’s positive divergence.

That would be the first sign that we are approaching a bottom in this market. That’s the one thing that was missing on Monday’s market decline: We didn’t have that sort of positive divergence. We did get oversold conditions.

The McLellan Oscillators from the New York Stock Exchange and the Nasdaq both reached below the -60 level (that says that we’re extremely oversold).

The VIX of course shot way the heck up there. I think it hit as high as 65. Then it came back down back inside its Bollinger bands. So we have another VIX buy signal.

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Bottoming Followed by a Rally?

All of those things suggest the market should be nearing a bottom. The only thing missing is that positive divergence. So once again what I’m looking for is one more move down testing Monday’s low.

Maybe even dropping a little bit below that. And then on the intraday charts 30, 60 and the 120-minute timeframes, we can see things like the MACD holding above Monday’s low, the RSI holding above Monday’s low, the CCI holding above Monday’s low.

If that happens, and we maintain these oversold conditions that we’re looking at right now, I think we have the makings of a sustainable rally that could last throughout the rest of August.

I do think Monday was kind of a shot across the bow for the intermediate term, meaning that once we get this next sustainable rally out of the way, things could look a little bit dicey at the moment. I’m favoring the idea that whatever rally occurs over the next few weeks is going to form a lower high.

And I’m going to look for a low or a waning of that momentum once it starts to turn over. That will probably be an opportunity to add some short exposure to the markets. And that’s something we haven’t been able to do much this year because we’ve been on a one-way ramp higher.

But typically the best time to short stocks or the best time to short the broad market is when it makes the high starts to fall, comes back and makes a lower high, and that momentum starts to roll over again.

That’s your opportunity to short if you try to short at the highs. Well, this year you’ve gotten run over and it’s one of the things that hasn’t been available to us. We haven’t been able to take advantage of any short selling opportunities because the market hasn’t presented those, low-risk, high-reward opportunities.

On the short side, if you’ve been shorting all year long, you’ve been getting your tail handed to you because the market just kept powering higher.

Then all of a sudden, out of nowhere, it seems the market had this decline this week. That’s the shot across the board. So for the next rally, once it starts to roll over, the momentum starts to wane a little bit.

That’ll be your opportunity to short. So like I said earlier, don’t get upset about the opportunity that you missed the short the market maybe a month ago. Those opportunities will exist in the future. Don’t be upset if you miss the opportunity to buy a few days ago, because I think we’ll have the opportunity to buy a few days from now.

Like I said, the great thing about this business, the great thing about the market, is we have these opportunities that present themselves all the time. So whatever we missed yesterday, you can make up for tomorrow.

With that in mind, I’m going to get back to vacation. I’ll still be posting essays and posting videos as we go through here, but I just wanted to get this one out to you really quick – let you know my thoughts about the market and we’ll go from there.

So we’ll see you next time.

Take care,

Jeff Clark
Editor, Market Minute