We would also suggest that the kind of action we are seeing is what we have been looking for – violent up and down action with virtually no net price change week over week.
Friday’s action was, on the surface, terrible but the internal indicators looked a bit better. The message here is to use risk management, especially if 357 on SPY is breached, as that would mean the false breakdown low formation has failed.
We mention that there is no buy pattern yet, but it feels close. We would like to see a period of sharp up and down movements without much progress in either direction – choppy action that wears people out.
A move above 45 on FVX, and below 98 on MUB would call this bottoming action into question. Breadth indicators remain oversold, so a short-term rally is possible later this week – but it would be best, in our view, to see choppy sideways action rather than an immediate rally.
We are seeing some of the “they take the best down last” syndrome as dividend stocks and dividend stock ETFs are showing some give up here. Put/Call ratio is not spiking as it did in 2018 and 2020.
We are still in sell mode on the stochastics and some external indicators. While the interest rate picture portends higher short rates are possible, longer rates may stabilize sooner.
There are increasing signs that really heavy selling is being exhausted. SPY could test 430 again, and this would suggest we are starting a basing pattern.
We have suggested that advisors now look at indicators such as daily stochastic recycles to add as we move into September. Equities are down enough to suggest that something is being discounted – and maybe it is the current recession! There are bottoming signs in the Chinese markets – accumulation is turning up and support is holding.
Stocks have sold off into our buy area, and indeed closed below the 400 area on SPY we have been looking for as a place to add money. We need to see improvement in the internal indicators, and we will get most of our next readings this weekend. Below 110 on TLT would be a concern.
We may bounce around here for a while but if we are correct, stocks should not go much lower. Market has moved into the top end of our buy zone but early, although just how early is debatable. Since oil and gasoline are major contributors to inflation, a rally here would stoke inflation fears.
We still have downside targets in the 405 to 400 area on SPY. We also note that grains and oil are rallying a bit, as we thought they might. This could contribute to winter inflation and Powell’s interest rate stance.
The daily stochastics on SPY and QQQ have gone into sell recycles, and the weeklies are overbought. Since the indexes have rallied to resistance, it is logical to expect some pullback from this area. Our Put/Call chart suggests that in spite of the very negative anecdotal sentiment, people are not acting too bearish, and that bearishness is falling off.
The fact is this expiration is too difficult to call in terms of direction, so we would use weakness and moves below strike prices to add stocks, especially in Healthcare and Biotech.
The indicators suggest that the first part of a low is in, and we will watch on the inevitable pullback to see how the indicators look. This week is options expiration, so there should be some sharp up and down moves.
We attacked our target zone of 418 on SPY, and with overbought breadth oscillators and some weak internals as well as overbought daily stochastics, it is likely to pause and pull back here. It should test 408 to 405.
We have no changes to any views expressed in Monday’s Weekly Review. KWEB is stronger than GXC. So far, these look like trading ranges and not disasters.
While we may have started the intermediate bottoming process, and some intermediate breadth indicators have improved, we still are a ways away from having a solid buy signal on our internal indicators. Do not overlook Small Cap Value.
We continue to see bottoming signs on an intermediate basis even as we see some short-term problems. Our view that the FED will NOT go as big as market pundits are suggesting (which we have been forecasting for over a month) is what the market is saying to us now.
