Poised for a rebound

Mid-week market update: The S&P 500 became extremely stretched in mid-June when its 14-week RSI exceeded the 90 level. The last two times this happened, the market eventually pulled back and the initial decline was arrested with RSI reached a neutral reading of 50. That 50 target was reached this week, which I interpret as the market is setting up for a relief rally.
 

 

 

A bounce ahead

There are other signs that stock prices are poised to bounce. Subscribers received an email alert this morning that my inner trader had initiated a long position in the S&P 500. The NYSE McClellan Oscillator (NYMO) had reached a sufficiently oversold condition that the odds favour a tactical long position.
 

 

In addition, the Zweig Breadth Thrust Indicator became oversold as of last night’s close. In the past, such oversold conditions usually resolved in relief rallies.
 

 

Here’s another constructive sign of possible bearish exhaustion. The market was rattled by a Fitch warning that it was going to downgrade the credit ratings of several U.S. banks including JPM. While I understand that financials aren’t all banks, the relative performance of U.S. financials bounced back today. Moreover, the relative performance of European and Chinese financials appear healthy, which is an indication of a lack of contagion risk.

This week is option expiry week. Jeffrey Hirsh pointed out that August OpEx weeks tend to have a bearish bias – and that includes OpEx day on Friday. However, stocks tend to bounce back the following week. As a  consequence of the historical sloppy trading pattern of August OpEx, my inner trader decided to average into his long position over the next 2-3 days.
 

 

A contrarian magazine cover indicator

While my inner trader is positioning for a relief rally, he has few elusions about the durability of any possible rebound. the most recent Money Week cover provides a sobering contrarian magazine cover indicator that the market may need to fall further before the correction is over.

The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account.  Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

 

 

Disclosure: Long SPXL