The question that continues to arise this month is, "Is it over?". This correction was deeper than many expected or was about as deep as expected but it occurred so quickly. I'm finally getting some good news on my intermediate-term indicators, but not enough for me to trumpet the end of this correction. Interestingly, short-term indicators which have been so oversold the last two days, jumped up into neutral territory.
Before talking about the indicators, I think we should look at the SPY and see what price support/resistance is suggesting along with the Price Momentum Oscillator (PMO). The PMO looks very oversold; however, it's really not. The typical range for the PMO on the SPY (and most major indexes) is between +2 and -2. With a reading just below the zero line, the PMO is not oversold. It's actually the first time this year that the PMO has moved into negative territory and that is bearish. Looking in the thumbnail, it appears the PMO is decelerating somewhat and that could be considered bullish to some degree, but it is far from convincing. The 200-EMA provided enough support for this recent bounce, but if we are to see a sustained rally off this bounce, we need to see the PMO get us a BUY signal. I'd also add that a negative 20/50-EMA crossover will arrive soon if price cannot vault the 50-EMA. That negative crossover would give us an Intermediate-Term Trend Model Neutral signal.
The Swenlin Trading Oscillators (STOs) have jumped significantly on this bounce. Many might see that as positive, and it is to some degree--we want to see these indicators rising as it implies internal strength in the short term. However, I'm concerned that they will hit overbought territory very soon and that would be bearish in the short term. The negative divergence between the STO-B and STO-V has likely worked itself out with this correction, but I'll be watching closely. There is still room to rise, so I don't believe they are bearish, but we're already halfway to overbought territory which suggests the bounce will fail soon. I've highlighted when we see overbought tops.
Intermediate-term indicators have started to bottom. However, the PMO has not joined that party yet. It will take all three of these indicators bottoming along with positive crossovers on the ITBM/ITVM to convince me there isn't a retest coming. Notice back during the corrections in 2014-2016, these indicators pulled back all the way into oversold territory. We haven't see that yet. I think this leaves the door open to a retest given there is still plenty of room for all three of these indicators to fall.
Conclusion: I'm not convinced that the worst is over. Short-term indicators will be overbought very soon and intermediate-term indicators, while showing some promise, haven't made a convincing bottom yet. For now, the evidence doesn't suggest to me that the correction is over. I remain mostly in cash. Someone sent me a great quote that it's always better to be out of the market wishing you were in versus being in the market and wishing you were out. I don't mind holding a neutral stance for now.
Helpful DecisionPoint Links:
DecisionPoint Shared ChartList and DecisionPoint Chart Gallery
Price Momentum Oscillator (PMO)
Swenlin Trading Oscillators (STO-B and STO-V)
Technical Analysis is a windsock, not a crystal ball.
Happy Charting!
- Erin
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