For much of the past month, I’ve been telling my Delta Report subscribers there’s just not much to do.
The stock market has been stuck in a trading range. Most of the technical indicators have been stuck in neutral territory. So, with a lack of extreme conditions to trade against, I haven’t been offering my subscribers too many trading ideas.
That was a good thing.
As I tried to explain in a Market Minute essay last month, in this environment, most traders get chewed up. They churn their accounts chasing trades on the long side, then on the short side, and then on the long side again. But without any real movement in the market, these traders lose nickels and dimes every day.
That money adds up – especially after a month-long period of choppy action that goes nowhere.
It’s far more lucrative to wait until the market moves and the proverbial rubber band stretches into overbought or oversold territory. Then we can bet on the rubber band snapping back to a more neutral level.
Over the past month, the rubber band has been limp. It didn’t do anything. The S&P 500 was stuck in a trading range between about 2750 on the downside and 2770 on the upside. Most technical conditions never even drifted much away from neutral territory.
Until yesterday.
Stock futures were down sharply on Sunday night. The S&P 500 was headed for a lower opening on Monday. So, I posted the following comment on my blog (subscribers can access the full post here)…
After looking at all the intraday charts this weekend, I think it’s possible – though still unlikely, but possible nonetheless – the S&P could test its 50-day MA at 2715.
At that level, the technical conditions would be so extremely oversold that buying would be a no-brainer. So, I don’t think we’ll get there. But, on the off chance it happens, then keep some powder dry to jump in aggressively at that point.
Admittedly… I didn’t think the S&P 500 would sell off that much. But I was ready to start buying if it did. So I was buying stocks into the sharp decline yesterday, and I’m willing to buy into any weakness this morning as well.
Here’s why…
We’re finally getting the sort of extremely oversold conditions that often mark the end of a decline phase and the beginning of a new rally phase.
For example, yesterday the Volatility Index (VIX) closed above its upper Bollinger Band. When it closes back inside the bands, it will generate a broad stock market buy signal.
Also, the McClellan Oscillators for both the NYSE and the Nasdaq closed yesterday below their lower Bollinger Bands. This is an extended, oversold condition. And it often signals we’re near the end of a decline phase. Take a look…
The red arrows point to the times where both the NAMO and the NYMO closed below their lower Bollinger Bands at the same time. Here’s how the S&P 500 behaved following each of those times…
Oversold conditions on the McClellan Oscillators didn’t always mark the absolute bottom of the decline in stock prices. But they were close enough to the bottom to create low-risk entry points for new purchases.
With the VIX on the verge of a buy signal, and the McClellan Oscillators below their lower Bollinger Bands, it seems to me the downside risk to the market right here is minimal.
For the past several weeks, I’ve been arguing that traders should wait patiently to buy stocks until we get the sort of oversold conditions that can launch a decent summertime rally. We now have those conditions.
Stocks could still work slightly lower from here. But, I’m confident the market will be higher several weeks from now.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, gold remains a hot topic…
It is interesting to note that economist Harry Dent is predicting that gold will go down to $600-$700.
– George
Enjoying your insights. Thought you’d be interested in this: Governments of all the major economies are acquiring gold as fast as they can, and have been doing so for years. The IMF has told them that their seat at the G7 (or G8) depends on how much sovereign gold they possess, leading to special drawing rights (SDRs).
Therefore, when gold prices try to rally, they simply dump large quantities of paper gold (GLD ETF) overnight, and weak hands sell real gold the next day. The G7 didn’t lose any gold metal, and they suppressed the gold price easily, so they can acquire more on the cheap. But when that rubber band gets too tight, their gaming won’t work and gold will go up exponentially because of pent-up demand. I’m waiting for that… the news is just noise.
– Bob
Your readers made some good points about gold. For example, making the point that this time cryptocurrencies have stolen some of gold’s traditional demand, saying, “Much of this money would be in gold, creating the demand and price bumps you look at historically. But not this time…” But both readers seem to think gold is down. Is it really? Is the dollar a good yardstick?
Down against what? First of all, forget paper gold. Physical gold is in very high demand – in other countries. We’re almost sold out of it – when the bubble in fiats and cryptos break (two insubstantial proxies for real money), gold and silver won’t have a ready supply, and everyone will lose their faith in paper gold, too (paper gold is how the Federal Reserve Note got its start before it failed to be redeemable). When demand dies for fiat products, where will that demand reappear?
I’m not sure where the avalanche will start, but I think it will be a contagion among the intangible currencies – I think it’s a great idea to have a market-created currency rather than a government-created one, but I don’t think it can be intangible. I wouldn’t place any faith in digits and electrons keeping any kind of perpetual historical value… The order of events seems pretty certain – timing is the unknown.
– Sandra
How do you explain the action in gold today? Are you a buyer or a seller?
Let us know… along with any questions, suggestions, or other feedback… right here.