We are Oversold in a Downtrend. What Next?
Hello everyone,
This is week 11 of ∞ that I will be posting a written version of my stock market outlook.
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Last Week’s Action
Last week, every day except Thursday was negative and we have seen sustained weakness since the Fed Announcement.
We are below a declining 5 day sma, 21 day ema, and 200 day sma. We are also below an increasing 50 day sma.
Daily chart of the QQQ:
We remain in a long-term negative market and the short-term and intermediate-term trends are negative as well.
The weekly and monthly charts show this weakness.
Biotech and Solar names remain the strongest.
FSLR, ST extended but holding all KMAs while the market is below.
SWAV, a lot of biotech names have this flagging look, to varying degrees of strength.
The McClellan Oscillator remains at “oversold” levels
Remember just because something is “oversold” based on an indicator, it does not mean it is okay to buy and hope. It can always become more oversold.
The T2108 - the % of stocks on the NYSE above their 40-day SMAs is down to 31%
Leadership
In terms of leadership themes I am focused on these:
Solar
Healthcare/Biotech
Energy
Lithium
Sentiment
My sentiment survey was very negative this past Friday
The NAAIM has fallen steadily.
The Put call ratio is now at 1
IBD is currently at an uptrend under pressure.
Stock Market Outlook
My current view is that we are in a downtrend on most timeframes. We are extended to the downside so it’s not necessarily a time to be pressing shorts either.
We are “oversold”. This doesn’t mean that we can’t continue to see a decline but it does increase the chance of sharp countertrend rallies.
Take it day by day and manage risk along the way.
What To Look For (Same game plan as the last few weeks)
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
Great analysis, thanks Richard.
Always appreciate your insight, Richard. Thanks!