Stock Market Buy Signal Suggests Early Week Upside Reversal

By: Angelo_Campione

The system for the SPY is on a Buy signal 75% Long

Well, what a week! Tuesday started with a rally that took us to the highest close in 16 months and then we finished the week with a loss of over 5%!

The question now: Is this the end of the rally that started around a year ago? i.e. is it time to run for the hills?

It seems that we could get a bigger correction this time around, but I don't think we'll continue to sell off. We had 2 days in a row of around 2% drops and it's been a while since we had this type of action and it's certainly spooked a few participants.

We're now approaching some key support points and our system is on a buy signal. This all looks like a good recipe for a reversal in the coming week.

Having said that, it could just be a bounce, yes the system is in buy, but the system is designed to capture shorter-term moves and so can change relatively easily. In short, I think we're due for a bigger correction, but that may not play out for another month or so.

The current selling has certainly shaken the bulls and jolted people out of their complacency and maybe enough to see a decent rally to catch the new found bears out.

The week is likely to be interesting.

SPX Chart - Bigger Picture

This seems to have been a key week for the bigger picture. We finally got a break down of the rising bearish wedge as well as a cross over of the MACD.

While this now looks bearish for the medium term, I've drawn a thicker trend line to show the current trend channel. Don't be surprised to see support kick in here.

As discussed in the general commentary section, we could see a bit of a rally before continuing lower for the medium term.

SPX Chart - Shorter Picture

The shorter term shows how the market easily broke the first level of support on Friday. Now we are approaching more serious support between 1080 and 1090.

If the bear camp gets too packed here, we could easily see counter move here, notice the RSI approaching an oversold level.

A likely scenario now is for a consolidation between here and the 1120 area.

For the week ahead, support on the SPX is around 1080 and resistance is 1115 - 1120.

The VIX Picture

The last two trading days shows an end to the complacency I've been discussing for the last few weeks. All of a sudden fear has been awakened and the VIX has added almost 50% in two days!

The chances favor a period of consolidation from here, note the RSI approaching overbought and also the MACD getting a little ahead of itself.

The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place. It tends to move inversely with the markets.

Performance

We're using a starting capital of $5,000 and allocations are based on 25% of this or the remaining balance.

Feel free to email me at angelo@stockbarometer.com if you have any questions or comments.

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By Angelo Campione

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