I see good news and bad news. The good news is the recent market pullback is bringing many stocks down off their lofty highs They are taking the time to consolidate, preparing for another up-move. The Stochastics indicators on many of them have come down to the buy-signal area.
Within a few days, we may see a number of reversals and upward breakouts along with Stochastics buy signals. We may see that, on the daily charts.
There are mixed messages on the S&P-500's chart. The index itself has formed a 5-day consolidation range. We'll have to wait until the index breaks out on one side or the other before we get a feel for the overall market.
The S&P's Stochastics signal on the daily chart looks ready to give another buy signal, like back in December. It has fallen below the 25 level and looks likely to soon rebound upwards.
The volume pattern is a bit worrisome. Volume on down-close days (red bars) are generally higher, and more numerous, than volume on up-close days (green bars). This is suggesting there is still more supply than demand. Many individual stocks show similar daily charts. So a prudent trader will wait patiently until the picture clears up.
The bad news is when you look at the weekly charts. Very few have come down off the high Stochastics levels on the weeklies. The S&P-500 for instance has only barely gone below 25, the level the indicator has to fall below, then rebound above, to be considered a buy signal. The last time the S&P was well down below the 25 level was in early 2009.
Why is this important? Sooner or later the value investors will determine there are no good values left anymore, and they will start taking profits. There are countless articles currently in the press that cover the currently high P/E ratios, Price-to-Book ratios, and so forth. These will eventually lead to the institutions selling en-masse.
The down-cycle will eventually come. It must, to clean out and refresh the markets. You can't time it, you can't say it will start a week from now. Our current markets could go on for a few more years. But with each passing month, each passing week, the markets are only delaying the inevitable.
Short-term traders cannot be too concerned with this, but it never hurts to be aware and prepared. Individual trades can still be done when they meet good higher probability setups and are well managed for their risk/reward levels.
But the entire market does not move in sync. There are always some individual stocks that have recently gone through the cleaning process and may be due for a new up-cycle – the Stochastics patterns on their weekly charts can point them out for further investigation.
There is one whole group of stocks that right now are likely completing their longer-term cycle lows. In today's newsletter I give a couple of examples with good setups forming.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, including what to do right now after last week's market drop, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2014 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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