“History doesn’t repeat itself, but it often rhymes” – Mark Twain.
The Feds objective is market growth demonstrated by a constant uptrend in stock market performance. By printing money, the economy can appear strong but increasingly the economic data does not support the case.
We have seen an increase in the number of Coronavirus cases as many states have relaxed their lockdown measures.
But just like many peoples sentiment about the virus, as people reintegrate back within socially unacceptable distances, traders just don’t care.
Since fundamentals are thrown completely out the windows and we now live in a traders market. There were 3 momentum indications that showed this pullback was coming.
1… Moving Averages (200-Day SMA vs 50-Day SMA)
The percentage of stocks trading above their 50-day moving average was above 90%. Meaning: Short-term momentum in the markets was extremely bullish. Simultaneously however, the percentage of stocks trading above their 200-day moving average was below 50%. Meaning: Long-term momentum in the markets was bearish. With this contrast, momentum does not match with other technicals and represents we were not in a true bull market. This also confirms the large recovery since March was not a new leg up and the second shoe is there to drop.
2… Relative Strength Index (RSI)
Prices within markets have been consistently increasing. However, when looking at how overbought markets have been, it is clear to see that a pull-back could take place. Usually, when the RSI is over 70 and is indicating an overbought or overvalued environment, we may be primed for a corrective pullback. The S&P 500 Index (INDEXSP:.INX) RSI reached 85 before yesterday’s pullback.
3… Put-to-Call Ratio
When the market is buying more puts than calls, it suggests that a bull-market is ahead. The ratio dropped to 0.37. When you look back in history to when we have seen these levels before, its not a massive shock as to what happened next…
Watch the full interview to see the technical indicators Wealthpress Head Trader Roger Scott is looking at to judge the future direction of the stock market.