Looking at the past few trading sessions, you might think stocks have lost their momentum.
The S&P 500 has gained only six points from where it opened on Monday. It’s gone basically nowhere. And, after last week’s 6% recovery from the May low, that move may seem disappointing.
However… This week’s choppy, back-and-forth action is exactly what the market needed. And, for reasons I’ll explain in today’s essay, it’s setting the stage for a strong rally next week.
Take a look at this daily chart of the S&P 500…
First, look at the Relative Strength Index (RSI) at the bottom of the chart. Even after last week’s 6% rally, conditions haven’t yet reached overbought territory. (An RSI above 70 is considered overbought, while a reading below 30 is considered oversold.) That tells me stocks still have room to run.
You see, when stocks rally every single day, conditions get more and more overbought. It makes the chance of any further gains less likely. And, it becomes more likely that the “snap back” to neutral will be violent. (For an example, take a look at what stocks did last January, before 2018’s first big selloff.)
Right now, because stocks have spent the last week chopping back and forth, we just don’t have that likelihood. The RSI is still neutral.
Also take a look at the various moving average lines plotted on the chart. The 9-day exponential moving average (EMA) just crossed above the 20-day EMA. That tells us the short-term momentum is picking up steam. And, if both of those lines cross above the 50-day moving average (MA), we’ll enter a new intermediate-term uptrend for the stock market.
There’s one more factor that has me bullish on the market… But it’s not on the chart.
The Federal Open Market Committee (FOMC) will release minutes from its latest policy meeting next Wednesday. Traders are largely expecting the Fed to cut interest rates sometime this year, which would provide a boost to the stock market. So, any indication from the Fed that it will continue holding off on hiking rates – or that it will cut them – will be bullish for stocks.
If you were disappointed by this week’s action, just be patient. For the short term, the stock market looks bullish.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, subscribers thank Jeff for his trade recap on gold…
Thanks, Jeff, for the gold trade education. I’m interested in all you have to say to make me a better investor and trader. I am just getting started following you… Thank you for the educational opportunity!
– Tony
I just joined your service a few days ago… I enjoyed the quick trade recap. I would, of course, like to see more.
– Chris
I enjoyed the trade recap on GDX. I only wish I had been a member at the time you gave the recommendation. Please keep them coming!
– June
Meanwhile, Jeff Clark Trader subscribers continue celebrating the GDX trade…
Thanks for a great trade. I bought the GDX calls for $0.49 and sold them for $1.45. Turned $1,500 into $4,350 in six days. Thanks again for a great trade!
– Bruce
I am glad that I joined your new service, Jeff Clark Trader. I know nothing about options, and my friends told me that options are very dangerous.
However, I know that options are very important to reduce risks in investments because I lost a lot of money by not knowing how to apply options to protect my investment.
Thank you for giving me a chance to learn. The first GDX trade excited me, and I could not wait to try Delta Direct. Thanks again!
– S.F.
Another subscriber comments on Jeff’s pre-holiday oil trade…
Thank you so much for the investment advice on USO. When I first started trading options about three or four months ago, I bought USO and had to sell it for a loss.
I have learned to look at a stock based on its annual/yearly charting, which makes a whole world of difference. I bought 10 contracts on USO this morning and believe you are correct that USO will be much higher in three weeks. Looking forward to the sale of the options!! Thanks again.
– Brian
Thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.