The following is just a small excerpt from my latest Weekly Strategy Session (please click on that hyperlink for details about trying it out). which I published for members and 12631 subscribers this past Sunday.
The S&P 500 Index is currently flopping around in between its 50 and 100-day moving averages, effectively frustrating bulls and bears alike. We saw this churning action throughout last week, with the market alternating between opening gaps higher and lower. Overall, the broad market remains in a corrective phase, compelling traders to continue to stay in heavy cash and use discretion with any positions taken, consistent with the theses over these past several Strategy Sessions.
In attempting to discern whether the current price action is consistent with a mere consolidation before we break lower yet in a bull market correction (we are still clearly in a multi-quarter/year bull market until proven otherwise, as evidenced by the clearly-rising long-term moving averages not he major indices) or, instead, whether we have already put in a good low and will now move imminently back to fresh highs, it is worth considering several characteristics of the current S&P 500 Index daily chart.
While the 2013 playbook says that each shallow pullback, such as the one we have seen in recent weeks, is to be aggressively bought in anticipation of a “V-shaped” rally back to new highs, it is worth remembering that the one-way action we saw throughout 2013 is often the exception–even in strong bull markets–rather than the rule for an entire year. Beyond that, as I noted last weekend, the market can be a devious manipulator, trapping traders into complacently assuming that each minor pullback is an easy buying opportunity, only to abruptly pull the rug out from underneath in a cold manner via an unforgiving deep correction.
Updating the S&P daily, you can see price trapped in between the 50 (darker blue line) and 100-day (grayish line) moving averages. That 50-day moving average is now slightly declining, which is further evidence of a market still in correction mode. Beyond that, price has still not tested its 200-day (yellow line) moving average since November 2012, an abnormally long time to go without such an occurrence.
Furthermore, our Bollinger Band analysis remains in full control on this timeframe, which means we should continue to respect it until otherwise negated. Recall that the “pinched” Bands indicated the compressed price action, which led to the explosion lower two weeks ago. That directional move lower is still intact, which is another factor in the correction camp to respect.
Another aspect of the broad market structure to consider is the NYSE McClellan Oscillator (“NYMO”), which is a simple market breadth indicator tool. Generally speaking, when NYMO is above zero it tends to indicate bullishness for stocks, and below zero, bearishness. However, extreme readings can indicate overbought or oversold conditions. Above 50 is considered to be overbought, while below -50 is considered oversold.
Updating the NYMO daily chart, you can see we closed last week out at -31.20.
This reading indicates that the market had alleviated, or “worked off,” mildly oversold conditions from early in the week, but is still in corrective/bearish territory, below zero.
The bearish interpretation is that NYMO was never very oversold to begin with during this pullback, at least nowhere close enough to compel traders to “buy blood in the streets,” and that another leg lower is imminent as the market worked off mildly oversold conditions by merely churning sideways last week and will now resume the correction lower.
Short-term, nimble traders may continue to sell the 50-day moving average and buy the 100-day until we see a decisive break one way or the other. The 1770-1772 area on the S&P is critical downside support for bulls to hold in order to avoid a much deeper pullback to major 1746 support.
Overall…
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