Is the Stock Market Trying to Bottom Out?

2022년 5월 23일

Today we have a daily chart of the S&P500 (SPX) with two momentum indicators below it:

1. RSI (Relative Strength Index), and
2. MACD (Moving Average Conference Divergence)

When I took the chart back two years, I didn't see anything that led me to believe there was a ton of potential support at these levels, so I zoomed in and went back (just under) a year into the past.

That being said, we don't need a full year to see some of the potential "hints" of what could come in the future.

First off, RSI never got oversold (i.e. - it never fell below the bearish level of 30) during this most recent leg down.

Normally, in a bearish regime, we'd expect lows in price to accompany crosses below 30 in RSI, but that didn't happen this past few weeks. This action in RSI is thus a bullish piece of evidence for the market in the near-term.

Secondly, there are two things I'm watching when analyzing the MACD indicator on the SPX:

A. We can see a pretty clear, bullish divergence in the MACD histogram. To elaborate, we're seeing lower-lows in the price of the S&P500 (above), but we're seeing higher-lows in the MACD histogram... another piece of bullish evidence.

B. While it hasn't occurred yet, it looks as if the MACD line is "trying" to cross above the MACD Signal Line, and if this takes place, it would also be a bullish sign for the S&P500.

In conclusion, while we're starting to see some bullish evidence in the overall market, it's crucial to focus first on the primary trend, which is DOWN for the vast majority of major market indices.

So, while all this evidence mentioned above could be predictive in nature - and while we could see a rise in the S&P500 from here - such an event could also turn into a mere "bear market rally," which means "a bounce within an overall downtrend before another leg down."

As such, it's even more crucial to keep your risk management top-of-mind, know where your stops are, and stick to your rules - whatever they may be.

Lastly, everyone trades on a timeframe... know your timeframe and stick to it.

For instance, if you're a short-term swing-trader, then this analysis isn't going to apply to you. On the other hand, if you're an intermediate-term trend-follower, then this should be right up your alley.

For the CMT Association,

Adam D. Koós, CFP®, CMT , CEPA
President / Portfolio Manager / Sr. Financial Adviser
Libertas Wealth Management Group, Inc.