I believe that the overall trend for the US stock market averages is now sideways to down. I explained why in a post last week and in a video I put on Youtube yesterday. However, the stock market averages are now deeply oversold on an hourly chart. That sets up a high probability of an oversold rally this week. Take a look for instance at the chart of the S&P 500.
Notice that the hourly stochastics are below 20 to show that they are oversold. When the market dumped after Labor Day the S&P 500 fell to 3325 and then had a rally back up to 3425. That rally started with a similar oversold condition that exists now.
Another oversold rally is likely. If it happens look for the S&P 500 to get into trouble in the 3300-3325 area. That’s the area of the blue downtrend resistance line and the price low of the other week.
Note though we are looking at the trend on an hourly chart. This is not a weekly chart much less a monthly chart. So it says nothing about what the market is likely to do after this month is over. What would happen when an oversold rally becomes overbought? Last time the market dumped.
There are a lot of reasons to think that the market is now in a sideways to down trend going into at least the November election now. So a rally from here this week would simply be a part of such an overall trend. Hourly charts and daily gyrations are what people focus on, but bigger trends are where the real money is made.
In my Youtube video yesterday I explained why I think the market has been fading this month even if we can hope that an oversold rally can hit my target.
This video essentially lays out what I explained last Friday in my post on the market for you.
I wasn’t shocked by yesterday’s drop and I won’t be surprised if the market rallies for a few days here. When you stick to the bigger trends as the way to understand what is happening then you rarely are ever taken by surprise in the markets.
If you are new to trading and want to understand how to read market trends better grab my book Strategic Stock Trading.
-Mike
