Determining what kind of correction is taking place in US stocks

13 thg 10, 2018

There have been two major market corrections since the end of the Great Recession. They were periods of high volatility and a lot of repricing of stocks for 140 days or more.

In both cases they started with:

1. A complete reset of the RSI (Relative Strength Index below 20)
2. The S&P 500 holds below the 200 day MA
3. The 50bar EMA passes below the 100bar EMA

They end when:

1. The S&P 500 holds above the 200 day MA
2. The RSI holds above 50
3. The 50bar EMA passes above the 100bar EMA

We are clearly not in a recession in the US, at the moment all we have is a strong reset of the RSI. The S&P 500 held above the 200 day MA and the 50bar EMA is well above the 100bar EMA. Because it closed on the lows of the day on Thursday the RSI was hit hard.

I think we will have our answers in the next 10 days. If this is for real, we will see all 3 conditions met and people will be talking doomsday talk all the way through March. I will be looking for cheap stock prices to buy stocks when the S&P 500 reaches 2600 to 2550. We should also see higher trading volume of course, it has been relatively low since more conservative investors got spooked by Trump's trade war earlier this year.

We have really high PE ratios in tech stocks so if we fail to stay above the 200 day MA next week I will short the NASDAQ with ticker SQQQ. Gold miners should do well in the short term since all of this is based on inflation fears. Common sense dictates however that gold will not rise for any reason other than short-term fear and that higher bond yields will keep gold down once fear subsides.

The TTW (Trump Trade War) is good for the dollar, bad for the developing world, bad for retail stocks if it continues into the holiday season. It is also bad for exporters since the dollar is going up. Tech stocks will bottom faster and recover faster than anything, the TTW does little to hurt their profits.