SmarTrend Called Last Week’s Correction. What’s Next?
What a difference a week makes. Readers of our Morning Call newsletter were forewarned of the 4-5% correction in the market which indeed occurred as the S&P 500 closed the week sharply bouncing above and below its 50-day moving average. The percentage of stocks in an Uptrend fell sharply to 53%, down from 73% in the week-ago period. The drop to 53% is notable as it is lower than levels reached during prior corrections and may be indicative of a near-term top forming. Holders of equities may be looking to cash in on some of the extraordinary gains realized since March as volatility, as measured by the VIX, has reached levels not seen since June of this year. The return of the average Uptrend has declined with our Downtrend calls picking up steam - moving from an average of 0.9% decline three weeks ago to more than a 7% decline currently. Also expected, the number of Downtrends that are now ”in-the-money” has also risen to 84%, up from 65% last week. As these numbers point to a topping process, whether or not this is merely a leveling off after an incredible run or the start of a much larger correction remains to be seen. In either case, readers of our Morning Call will be among the first to know which scenario is playing out.
How and when will we know if this is a “topping process” (please explain) or if a leveling off will lead to a much larger correction? I get morning call every morning and read it before I read the WSJ-it’s all in one place and much easier to understand. Looking forward to your answer - Thanks.
If the market fails to get above resistance (approx. 1100 on the S&P), the we could be stuck in a range for quite some time between 1040 and 1100. Not great, but still may be tradeable. A breakout above that level would be bullish and attact more buyers off the sidelines.
In the other case, if we make a “lower low”, that will invite some sellers into the market. The most recent low in this most recent correction was 1029. In the prior cycle it was 1019. So far, we’ve made a higher low which suggests this intermediate uptrend in the market remains in place. Once a correction breaks below a prior cycle’s low, that will be a sign for caution.
The 30 and 50-day moving averages which had been sloping up for monhs have recently turned flat. That is another sign that sideways trade may prevail for some time as the indices bounces around them.
So, if the DJIA sinks below 1019 or 1029 we should watch out? Also, how can I use SmarTrend to trade in a fairly flat market?
Good question Andrew — how do we use SmarTrend during a market plateau?
@Andrew
While most stocks tend to move with the market, there are still winners and losers during plateaus and valleys. You will notice that the number of daily trend alerts has relatively slowed last week as the market struggles to find direction. This is typical when markets aren’t trending. It is a good time to find stocks you like and wait for that next upturn in the market.