It appears that we might be due for a short-term bounce from the current levels. The past three trading days have almost been mirror images of each other, producing three doji candles on the S&P 500 chart, which is a sign of indecision and could put in a small bottom for equities. It would make sense, at least to me, that we not break right through 1400 on the first attempt. It seems like 1420 is still acting as a level of resistance on any potential rally we get in the next few days but I’m not convinced we will power through to new highs.
Below is a chart of the Western Asset High Income Opportunity Fund with a 2-day Rate of Change (ROC) indicator in the top panel. Back in May Tom McClellan produced the same chart in his “Chart in Focus” weekly email. I reproduced the chart on May 21st when we were near 1300 on the S&P, calling for at least a short-term bounce.
Well what we saw in May is not taking place today, with the ROC indicator breaking below -2. As you can see below (green dotted lines mark past occurrences), this doesn’t always concur with a market bottom, but it does seem to coincide with at least oversold bounces.
I really enjoy Tom McClellan’s insights and glad he shared this chart a few months ago. We’ll see what kind of momentum the bulls can build up.
Source: Flight From High Yields Marks Stock Market Bottom
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