Posted by Danny on May 23, 2016
Stocks had a quiet week, extending the slow slide that started in April. Will the selling intensify? We have a few more days of lunar red period to go, so if it does it may come sooner rather than later. But if every dip continues to be bought, as seems to be the case in recent weeks, then selling may dry up and pave the way for another strong upswing. Here is the current S&P 500 chart:
The market is basically unchanged since mid-March, and down a little over 2% since the April closing highs. Yawn… This is about as mild a pullback as one can expect after an almost 20% rally. Of course, this correction may not be over. A downward acceleration and swift drop below 2000 would alter the picture significantly. But until that happens we have to keep considering the scenario of a continued rally too. Investors are not prepared for a further rally and according to some measures bearish sentiment is already back to the levels last seen at the January-February lows. If that’s indeed true then the odds for a further rally are much better than most investors currently believe.
Technically the setup is gradually becoming more attractive. The slower Earl2 (orange line) keeps going down but is now well into bottom territory. The faster Earl (blue line) and MoM indicator are painting bottom formations as well. Once the Earl2 turns up we may get a great entry point, especially if the 2000 level gets tested in the S&P 500.
I wouldn’t rush in just yet. But I would stand ready to do some buying if this market turns up. Especially if it turns up without any clear reason to do so.