Mid-week market update: The S&P 500 ETF (SPY) traded out a possible reversal yesterday (Tuesday) when it opened down, fell, and recovered to close higher on the day. The move was accompanied by a positive divergence on the 5-day RSI and on above average volume. These are all signs of selling exhaustion and a capitulation bottom.
A Bottom Spotting Model Buy Signal
Equally constructive was the buy signal flashed by two components of my Bottom Spotting Model. As a reminder, the market has bottomed or neared a tactical bottomed whenever two or more components of our five components model triggered buy signals. The option sentiment components of our model flashed by signals when the VIX Index spiked above its Bollinger Band, and the term structure of the VIX inverted.
In addition, the equity-only put/call ratio spiked above 0.90 yesterday, which has marked short-term bottoms in the past.
The key risk to my forecast is the unpredictability of the war in the Middle East. Technical analysts can point to all the technical and sentiment studies they want, but the markets can be buffeted by unexpected developments of the war. In reality, risk appetite will not fully recover until energy prices stabilize.
In summary, I am seeing signs that market psychology is becoming washed out and the U.S. equity market is nearing a tactical bottom. My highly reliable S&P 500 Bottom Spotting Model flashed a trading buy signal as of the close on Tuesday. The key risk is the unpredictability of the war in the Middle East, as anything could happen.