The market came roaring back today. After a peak-to-trough correction of 8.9% in the S&P 500, the worst appears to be over.
I’ve found at least five reasons to be bullish.
Exactly one month ago, when the correction was just getting under way, I told you how I watch the Advance Decline ratio to determine when a sell-off has ended. A spike in this indicator tells me buyers are re-entering the market with vigor. I promised to let you know when this spike occurs… and that day is today. Take a look:
If you missed my original analysis, click here to see last month’s discussion of the Advance Decline ratio.
Basically, I forecasted the sell-off to continue until a noticeable spike, well above four, was observed in the Advance Decline ratio. I saw this spike when the markets opened this morning, with more than eight stocks advancing for every one declining.
That’s one reason I’ve turned bullish. But I have at least four other reasons that I’ll mention briefly.
Reason #2: Friday’s trading formed an especially bullish pattern called an “Outside Bar.” This pattern typically signals a meaningful turning point in the current trend.
Reason #3: The recent four-day pattern (last Wednesday through today) is very similar to the four-day pattern I saw in early June of this year. Then, this pattern stopped the market’s decline at 11% and prompted the four-month rally that added 16.5% to the S&P 500.
Reason #4: The market hit oversold territory on its RSI last week, suggesting the sell-off had gone far enough. This is historically a great level at which to enter the market on the long side.
Reason #5: The market turned on a dime when it hit the 61.8 Fibonacci level at 1,350. This level – a 61.8% retracement of the primary trend – is the maximum retracement that traders expect. For uptrends that continue higher, nearly all pullbacks are stopped by the time they reach this level.
So there you have it… my technical take on the correction that seems to have ended. Buying stocks the week of Thanksgiving has historically been a very lucrative strategy. With stocks still at a 7% discount, this looks like a great time to get long.
If you haven’t done so already read the Survive & Prosper issue on “The Power of the S-Curve.”