The major indexes dropped between 2 and 3% yesterday. The S&P 500 is down 4.6% since its last high a month ago. Of course everyone is wondering how far this pullback will go.
The bull market, since 2009, has been so strong that the first assumption I have to make, for now, is that this is just a longer-term cyclical pullback and not the start of a true bear market. In my article from August 10th, 2015 called How Long Can This Continue? I analyzed the Up/Down Ratios of all the component stocks in the S&P 500, and pointed out that the same conditions exist as back in October of 2014, which produced a 7.5% drop in the S&P 500.
Looking at an update to the Up/Down table in that article, we can take minor comfort in the fact that the number of stocks in distribution hasn't increased.
So until I see more evidence of major institutional distribution, I will assume this is just a cyclical pullback, and like the previous ones, may end up being less than a 10% drop.
For now it doesn't look like anything more than a pullback that should end in the next few weeks. Then what am I looking at for indications it is time to take chances on the upside again? I'm watching weekly stochastics patterns.
When we are in a bull market, the Stochastics indicators on the weekly charts of most quality stocks stay in the upper range, even in overbought territory, for weeks or months. Significant pullbacks tend to occur once a year, and when they happen, dragging the Stochastics down into oversold territory, rebounds in the indicators tend to line up with very good longer-term trade entries.
I picked Estee Lauder (EL) as one example, and the weekly chart shows that when the Stochastics fell to low numbers, they didn't stay there long. Rebounds, at least in this stock, were quick and ultimately rather profitable.
You will find many top stocks with this characteristic.
Right now, with Estee Lauder, we see that while the Stochastics are dropping they still have a ways to go to reach oversold territory. But on this particular chart, that could occur within the next few weeks.
Then from the seasonal chart for EL, starting about four weeks from now, we see that this stock has a good track record going through the end of the year into Q1 earnings season:
So this is what I'm looking for. I have a list of stocks with strong seasonal track records for the remainder of the year and I'm watching weekly Stochastics to time trade entries.
Of course something could happen to change the overall economic and stock market sentiment initiating a true bear market. But for now, I'm preparing for an active, and hopefully very profitable, final four months of the year.
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, please click on the following link: www.markettamer.com/seasonal
Copyright (C) 2015 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.
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