The Bear Market Worsens

Oversold, but where are the Setups?

Hello everyone,

This is week 2 of ∞ that I will be posting a written version of my stock market outlook.

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Last Week’s Action

Last week we saw continued follow through to the downside in the major indexes and most stocks. We undercut the year’s lows right near the 200 week moving average. We have been declining 10 out of the past 11 weeks.

Additionally, Oil and Gas Names suffered heavy distribution last week, many falling from near all times highs all the way to their 50 smas. This type of distribution indicates to me at least a short term trend change.

Here is XLE’s chart:

Despite the distribution, some stocks bucked the trend and although they pulled back, have stayed above their previous lows. This is a piece of evidence that you should pay attention to. Take note and build a list of these names as well as stocks holding above their 21 emas and 50 smas.

The major indexes remain in Stage 4 downtrends but are now a bit stretched below their 10 week moving averages.

The T2108 and T2106 are also at “oversold levels” However, in my opinion the word “oversold” is very dangerous. In the markets, what seems low often eventually goes lower. We may build a bear flag here and then continue downwards, or we may see a sharp rally. Never blindly buy simply because a stock/index is “oversold”. Always manage risk.

Ultimately, there is no point is guessing what will happen. If you are a short term trader you can look to play any rallies but if you are a position trader remain patient and wait for confirmation of a new uptrend from the leaders.

Sentiment

Sentiment continues to show increased fear.

The Put Call Ratio finally saw a surge above 1.15.

The action of the stocks and indexes is always much more important than sentiment.

The IBD Big Picture is currently a Market in Correction

Stock Market Outlook

Overall my stock market outlook is still a market in correction. We may be poised for a quick rally but the lack of proper setups gives me pause. Solar and Biotech appear to be the strongest groups.

Remember that the most important thing at the end of the day is to watch the price and volume action of the stocks themselves as well as the indexes. Be ready for anything and manage risk.

What To Look For (Same Game plan as last week)

When it is time for a new bull market we will see divergences as groups decouple from the indexes and show relative strength. Setups will proliferate your screens.

When the market is ready it will be obvious, and it may happen when the news and sentiment is the absolute worst.

The leaders in the next bull market will once again have the potential to quickly double and triple and they will likely be completely new names that are unfamiliar. Try not to become biased and focused on last cycle’s winners.

Follow the sector, industry group strength, and look for the strongest stocks coming out of these strongest areas. As the market bottoms these future winners will likely be completing bases and may even be making new 52-week or all-time highs.

Keep an eye out for turnaround plays with excellent earnings and sales growth as well as recent IPOs within the past 2 years forming out their first proper bases.

Have patience, preserve your mental and financial capital, and be ready. Stocks can shape up faster than we think.

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Have a great weekend!

-Richard