Mid-week market update: In my update last weekend (see Waiting for the sell signal), I observed that the S&P 500 was oversold and due for a relief rally. The market cooperated by printing a hammer candle on Monday, which is a capitulative reversal indicator, and confirmed the reversal with a bullish follow through on Tuesday by recapturing the 50-day moving average. The index finished the move today with a doji candle, which indicates possible indecision.
That was the buy signal. There was also a sell signal.
Time to sell?
On the weekend, I also highlighted a possible deterioration in the intermediate breadth momentum oscillator (ITBM). I was waiting for the 14-day RSI of ITBM to recycle from overbought to neutral as a sell signal for the market.
I got the signal on Tuesday. The chart below shows ITBM sell signals in grey for bullish outcomes and in red for bearish outcomes. The sell signals have been correct about three-quarters of the time.
In addition, Ed Clissold
of Ned Davis Research pointed out that NDR Trading Composite Sentiment is still in neutral. Trader sentiment isn’t washed out yet and there is more room on the downside for stock prices.
Similarly, all the components of my market bottom model are also neutral. If the stock market were to experience a downdraft, there is lots of downside potential before a bottom can be reached.
Jason Goepfert at SentimenTrader
observed that defensive sector breadth is exhibiting an off-the-charts level of internal momentum.
He did add a caveat that these conditions are not necessarily bearish.
It’s assumed that if investors are so hyper-focused on defensive stocks, it’s a bad omen for the broader market. Not to be. While the S&P 500 didn’t exactly go gangbusters after these signs of long-term internal momentum in the defensive sectors, it still showed above-average returns.
I interpret these readings as the bears are seizing control of the tape. The combination of neutral sentiment and a loss of intermediate momentum raises the odds of an air pocket for equity prices in the near term. Subscribers received an email alert today that my inner trader had initiated a short position in the S&P 500.
Disclosure: Long SPXU