The Stock Market is Trying to Bottom.

Plus, a New Trade with a Seasonal Flavor and a potential for a $700-$800 paycheck.

The Stock Market is Trying to Bottom.  Plus, a New Trade with a Seasonal Flavor and a potential for a $700-$800 paycheck.

Last Monday, April 16, 2024, in a post titled: “It’s Always Darkest Before the Dawn. But Everything is Oversold Now,” I suggested that traditional fear gauges were flashing encouraging signs while bond yields, the market’s breadth, and the major indexes were approaching potential reversal points.

As I write this morning, there are some encouraging signs, although the market is nowhere near out of the woods just yet.  Consider the following:

·        The CNN Greed/Fear index is well into the Fear area now at 35. A month ago, it was in the Greed area at 71.  That’s a rapid and bullish shift in sentiment;

·        The New York Stock Exchange Advance Decline line (NYAD) is attempting to bottom out; and

·        The CBOE Volatility Index (VIX) is heading lower after tagging its recent high near 19.

Together, these indicators are encouraging as they suggest that the fear in the market has reached a point from where a tradeable bottom may develop.

What needs to happen to confirm the bottom?

First, the market must hold above the recently established support levels and second, it has to move steadily higher from here.

When it comes to the market’s breadth, we need to see the NYAD remain inside its lower Bollinger Band, as it is doing in the early going this morning.  We also need to see NYAD move above its 50-day moving average.

In addition, the S&P 500 (SPX) needs to hold above 5000 and along with NYAD needs to rise above 5100 and its 50-day moving average.  What’s encouraging is that the RSI for both SPX and NYAD are hovering above the 30 area, registering oversold readings.

What could go wrong? A plausible setback may result if the developing bounce fails at the 50-day moving averages or never makes it to that key resistance level.  That would likely trigger a new bout of selling.  If there is a bright side to this scenario is that even if SPX and NYAD make new lows, they may turn out to be panic lows in a double bottom formation, from which stronger rallies may ensue.

So, for now, we are encouraged. But we need to see more before declaring an all clear.

On the other hand, these types of situations often create special situations which offer excellent trading opportunities.  I have one such trade just below.