The S&P 500 is whipsawing in no man’s land, just above the August swing low, and below the September swing high. The longer-term technical picture remains bullish despite the recent instability.
While the S&P 500 is in a shallow rising channel since May, the whole pattern is a correction. Corrections have elevated volatility, especially near their ends. The correction may continue for some time, but the correction is expected to end with the price moving higher. The outlook below explains why.
Corrections are followed by a trending period where volatility is lower. Why is this a correction? Despite the S&P 500 making some incremental higher highs in recent months, the majority of the price action has been sideways, with a small bias to the upside. Compare that to the trending rise in early 2019. The current price structure is very different. We are already in the correction that everyone seems to be so worried about.
My Twitter and Facebook feeds have been loaded with negative sentiment, everyone expecting big declines. We know that most traders lose money, so the popular opinion is often wrong when their cry is the loudest.
To me, the line is the sand is 2822 on the S&P 500. If we drop below that, I will move to a more cautionary stance. Recall, I am trading stocks (not index products). So a cautionary stance means that I won’t be taking any new long trades until the price action turns bullish on the major indexes. A cautionary stance doesn’t mean I sell the few positions I own…they each have their own stop loss and profit target, so they will continue until the trade concludes per the original strategy for that trade.
Overall though, over the next several months to a year, I am bullish. That would prevail even if we edge below 2822, because it is still possible the S&P 500 is then moving in a big range, which is still just a correction against the early 2019 rally.
As indicated in the prior S&P 500 analyses, we still have major bullish patterns in play which have not been negated.
- Still in a rising channel structure since May. At the start of October, the price bounced aggressively off the bottom of that channel.
- Also bullish are the 3 major upside days that occurred during that range (based on upside volume versus downside volume). Historically, after this has occurred the S&P 500 has moved higher by 13% over the next year.
- The NYSE advance-decline line has also pushed to new highs ahead of the S&P 500. This shows that a wider stock base than the S&P 500 is moving higher. On almost every occasion when this has occurred the S&P 500 has followed and made new highs.
- 20% corrections are quite rare and are a typical stock market crash. We already had one in 2018. Because we had two 50%+ crashes in the prior decade we tend to think that is the norm. It is not! Crashes like those are very infrequent. With a recent 20% crash, another is quite unlikely for some time. More likely, we had our big correction and are now in the initial stages of a new bull market.
Watch These Sectors
The following chart shows major sector ETFs. These provide some clues for where to look for the best opportunities, and where to focus screening efforts to find stocks to swing trade. For example, if you like the look of the gold sector, you could put criteria into your stock screener to only show results from the mining sector which also meet your other criteria.
Gold and gold miners (GDX) are in a pullback within what looks like a new longer-term uptrend. A potential gold buying opportunity is discussed here.
REITs (RWR) are still strong and hovering just below resistance. A breakout would mean the strong REITs continue to perform well. They also cashflow well, usually providing a dividend or two while swing trading them.
Materials (XLB), Technology (XLK), and Consumer Discretionary (XLY) moving higher off trendline support. These are the sectors I am starting to look more closely at again, trying to find the stocks that are performing really well within these sectors.
Financials (XLF) and Industrials (XLI) are approaching horizontal support. Also looking in these sectors for the strong performers.
Consumer Staples (XLP) and Utilities (XLU) are still strong. Look for stocks that are close to breaking higher again, or that already have.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, or even more than you deposited if using leverage.
By Cory Mitchell, CMT @corymitc