The major US markets have been structurally damaged, increasing the likelihood of a large correction beyond what we’ve already seen. That being said, we are keeping an open mind and searching for evidence that we could see a short term bounce in the US market (S&P 500, Dow, Russell 2K). Here are some signs that we’re getting ready for a relief rally:
- Russell 2K (See chart below) | Positve candle formation and a daily close above previously broken support (1082). The Russell 2K tends to give early signs compared to the rest of the majors. The basing by this small cap index is a positive development. It is very close to reaching 1100 and closing our Russell 2K short trade. *NOTE: at publication time (close of trading, Friday), the positive candle development turned neutral if not bearish.
- 50 day Rate of Change (ROC) on the McClellen Summation Index (not shown) | This indicator looks at the 50-day rate of change (ROC) in the Summation Index. It simply compares today’s value to that of 50 trading days ago. Mathematically, it is another way of quantifying the total of the last 50 trading days’ McClellan Oscillator values. When it gets to a deeply negative value, it indicates a longer term oversold condition for the market, one which is difficult to sustain past a certain point. When this indicator turns back up again, the message is that the big oversold condition is waning, and a rebound period is getting started. That is the condition in which we find ourselves now.
- The CBOE VIX Index (See chart below) needs a breather | The VIX gets its share of criticism, but in rapidly moving markets it has its place in the toolbox. Research by Nick Colas of Convergex shows that the long term VIX average – back to 1990 – is 20 and the standard deviation around that mean is 6. That means at 26 and 32 you have 2 reasonable levels where the VIX should top out. Now, if you think we are entering a period of real crisis, the numbers shift higher. Typically the VIX averages 28 when things are really bad (think back to the Financial Crisis) and the standard deviation rises to 8. That puts the target at 36 and 44. Bottom line: don’t try to pick a bottom until the VIX gets to at least 26. We reached 26.00 yesterday. *NOTE: at publication time (close of trading, Friday), the VIX closed at 21.99.
The evidence above points to a short term bounce. But as of this writing (close of trading), it appears the bounce may have already taken place intra-day on Friday. To say the least, the market is at a major inflection point. We’ll provide more research, analysis, and if/then game-planning over the weekend. Next week is a big week for the market. Time to do some homework…