The stock market is oversold. We’re due (overdue) for a bounce. The proverbial rubber band is stretched to historic extremes. We could get a violent rally starting any day now.
I wrote all of those sentences over the past week. And, so far… not much has happened.
Oh sure, yesterday’s 41-point gain in the S&P 500 was a good start. But man, it was a struggle. And until the closing bell finally rang, nobody had any confidence the market would close higher. Monday’s ugly reversal was still fresh in everyone’s mind.
You remember Monday, don’t you?
Stocks gapped sharply higher Monday morning. The S&P ended the first hour at the high of the session. That’s usually a good sign that the market will make even more gains later in the day. But “usually” doesn’t mean “always.”
Stocks started to sell off around 2:00 p.m. on Monday. The Dow gave back a 350-point gain and actually traded down more than 500 points before bouncing back a bit in the final hour. By the time the closing bell rang, the market had suffered another loss. And most traders and investors were left wondering, “What’s it going to take to get a rally started?”
I think I can answer that question.
Take a look at this daily chart of the S&P 500…
The red line on the chart shows the 9-day exponential moving average. This is a short-term support and resistance line. If the index is trading above the line, then the short-term trend is bullish. Traders can buy stocks when the S&P 500 pulls back to the line in anticipation that support will hold.
When the S&P 500 is trading below the 9-day EMA, then the line serves as short-term resistance. Traders look to sell or short-sell stocks as the S&P 500 bounces up towards the 9-day EMA.
As you can see, since this correction started earlier in October, every bounce attempt stopped at the 9-day EMA. Resistance held, and the market turned lower.
Indeed, Monday’s big early rally stopped dead at the 9-day EMA. Then the market turned lower and sold off… hard.
So, the message seems clear… The S&P 500 needs to close above its 9-day EMA in order to kick off a new rally phase. Based on yesterday’s closing action, that level is 2698. And it will be slightly lower by the end of the day today.
While I think the market is setting up for a year-end rally, traders should wait until the S&P 500 can rally and hold above its 9-day EMA before betting aggressively on an oversold bounce.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, a Delta Report subscriber responds to yesterday’s Market Minute mailbag with their “drinking alone” holding…
Haha! Well, I guess it’s not exactly “alone” – but my worst performing holding that can’t seem to get off the mat and has me drinking alone in a corner is [a Delta Report trade]… 🙂
That aside, I am learning so much from your insights. Your daily observations and frequent intraday commentary are hugely informative. I feel like I’m back in school – but this time, actually learning something! I also do want to thank you for your frequent comments when the market is moving fast – both up and down.
You’ve saved me many a disaster, and your commentary has also helped me profit several times when others were dumping stocks prematurely. And the hand holding is invaluable, as you’re imparting hard-won wisdom rather than simply bloviating recycled platitudes – or maybe worse, waving arms in panic but providing no insight.
It looks like we’re coming into a very challenging period and my stocks aren’t holding up as well as I expected – as my portfolio is quite contrarian, so I expected it to zig when the market zagged. But so far, this tide is wiping out all boats.
Thanks again for your valuable service and insights. Yours is a service (it’s so much more than simply a newsletter) well-worth having. Cheers.
– Gregory
Another subscriber has a note for “Professor Jeff”…
Hello from Minnesota. I wanted to thank Jeff for the frequent communication even when the market is confounding! You are an educator and your thoughts enlighten me. As one of your students, I find your service particularly valuable and the best “online” (real-time) course in finance EVER.
Thank you, Professor Jeff. Glad to be under your instruction at a time like this. Thank you all.
– Sheri
Yet another responds to a Delta Direct update (Delta Report subscribers can read it here)…
I read a very small bit of fear in your October 29, 3:50 post. I think that’s bullish.
P.S. I can’t thank you enough for all the time and energy you spend with us.
– Robert
And finally, a Market Minute reader gives their take on copper…
Hello Jeff. I really enjoy your Market Minute updates. As someone who lives in the copper industry day-in and day-out, I believe we are heading toward a monumental rally in copper prices in the long term.
The industry just will not produce enough copper in 2019 to meet demand. In fact, we already are in copper deficit as the COMEX [the primary futures and options market for trading metals] warehouse supply has been steadily dropping since May, when inventories topped out at nearly 249,000 tons. Today that inventory stands at 159,000 tons and is going down every day.
Now, it has been many years since copper prices actually swung solely (or mainly) on supply and demand, which has become an outdated concept in our ETF world. But when the speculators hit the sidelines, then the real-world implications on the upcoming copper shortage will become apparent to all.
I would like to buy copper contracts (rather than a fund) as I think that is the best way to leverage rising prices.
– Richard
Thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming right here.