A repeat of history?

 We have been arguing for weeks to expect a low test around SPX 4200ish before the bottom of this phase of correction is firmly set up. Looks like this is a high probability that we may see that happen next week. This is very similar to what the market did last year around the same time (more details below). So we may very well witness a repeat of history next week. 

Barring unexpected lost control of the escalating middle east crisis over the weekend, I think SPX won't go much more down below 4200, which will be a launch platform for the upcoming year-end rally!

Thursday, October 19, 2023

Looking for a bottom

SPX has reached 4393ish during this dead cat bounce, just a hair shy from the 4400 target. I thought bulls still wanted to try to tag that level before heading down but the relentless interest rate increases these days have spooked them. It was a rather brutal day yesterday with several important supports being broken. As such, I think we can forget about the 4400 level as 4393 is close enough to consider it as being reached. More likely, the market is looking for a bottom for the year-end rally. 

That bottom is going to occur in one of two forms…

The cleanest action would have the S&P 500 make a lower low – slightly below the 4218 level, while the technical conditions reach oversold levels and the momentum indicators form positive divergence.

The other form of a bottom would be for the S&P to make a higher low, with oversold conditions. This form is a bit trickier to time correctly.

Either way, I do think we will see a decent year-end rally before going into a quite challenging new year. Personally, I wish to see a more solid bottom around SPX 4200ish but the Market God has never made traders' lives easy. We may very well see a rather messy bottoming process that could confuse everyone to wonder where the market is going.  So, my strategy is to slowly put money to work on the long side at various levels as we move lower, especially when we start to see oversold conditions. 

Right now, apart from the earnings, stock traders are going to need some help from the bond market to coax prices higher. So, keep an eye on TLT and HYG. They are quite oversold but if they can reverse and move higher then we should see some buying pressure in stocks.

The S&P 500 has resistance now at 4337, then 4350. Support is at 4300, then 4280.

Friday, October 20, 2023

A repeat of history?

The bulls have got really hard days this week and it is increasingly possible that we will see a test of the SPX 4200 low soon. This is the bad news for those who are heavily in the long positions at the moment. But it is great news for anyone looking for a bottom for the year-end rally. I'm one of the latter and I'm becoming increasingly excited now and want to be prepared for the bottom fishing. 

As of now, it looks eerily similar to what happened last year around the same time: We saw the S&P decline from 4275 in August to 3580 in September, and then hit 3560 in October before rallying to 4100 six weeks later. And, it appears history is repeating this year, but at a higher level. I think the bottom for this round of correction is around SPX 4200ish, about 20 points lower than the recent low at 4218. 

Of course as I have said many times before, the Market God won't make anyone's life easy and it may not like to make the bottom so easy to be detected. As such, we have to be mindful of another possibility that the bottom may come in another form: a series of higher lows with oversold conditions. In order to avoid missing the bottom, I'm willing to be a bit early to start building up some long positions, aiming for a decent year-end rally. 

In any case, buying at the bottom is not a fun thing to do as the overall sentiment is generally very depressing and it often feels like the world is ending. So not many, if not all people, will be willing to buy but it is often the best time to buy, oddly! Over the years, I have learnt and trained myself to be brave when others are depressing. This is one of those times I think!

If I feel the moment is right today, I may share a low-risk trade to get our feet wet for the long side.