First and foremost, I apologize for being inactive as of late. I have been swamped with schoolwork and college applications, but I am relieved to say that I have been accepted into the class of 2020 of my number one school.
As many of you know, these last few days have been anything but pretty for the market. While I believe that most investors should sit on the sidelines right now due to the volatility, the riskier investor may wish to make a bullish bet on a near term rally. I think that these last few days have made our market incredibly oversold and, furthermore, there is limited risk to the downside at current levels.
The best thing for the S&P 500 would be for an open above $200, a subsequent dip far below it (to trigger buy orders off the stochastics and RSI bottom) and a recapturing of the $200 level. If this occurs, a hammer doji will be created, drawing the attention of more traders for a swing in momentum.
But I'll reiterate that this trade is only for those who are willing to take a risk. If the SPY breaks below $200, I don't think it would be unreasonable to see $190 by the end of the year. I think that if you have a really long view (1-3 years), you can afford to wait for the volatility to shake out.
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I'll make this post short and sweet, just like the recent market rally. Firstly, I'm mad at myself for not catching the RSI diverging from the broader market (pictured above). When the RSI is not moving in unison with the trend of a stock or the market as a whole, then odds are that a reversal is about to take place. Since October, the RSI has been making lower highs and lower lows, while the S&P 500 - and the Nasdaq and Dow Jones Industrials - have been making higher highs and higher lows. This is only sustainable for so long, and shows that perhaps what you're seeing is a facade.
Superimposed on the chart above is the Fibonacci technical indicator. In yellow is a horizontal line showing, what I think, is going to be the point at which the market bottoms for good. On the way down from roughly 2100 on the S&P, we have hit support at 38.2%, 50% and mild support at 61.8% retracement. It is important to note that the superimposed Fibonacci is showing a 100% retracement at the October low, and is not drawn from the market peak in August. This makes me believe that we may see 1821 on the S&P and bottom. Confirmation of this as a bottom would be if the RSI continues to see resistance at the downward sloping trend line. All bets are off for a 1821 bottom if the RSI convincingly crosses above the RSI trend line. You can see above how there have been occasions on which the RSI has broken through the trend line, but shortly thereafter got punched below it. I would wait to see the RSI hold above the trend line for about one week before buying, should this happen before the S&P 500 reaches 1821. If the RSI crosses above the trend line as the S&P 500 nears 1821, then I would be pretty confident in doing a whole lot of buying. |