How To Play The Digestion Phase
From my seat, the action continues to be driven by the prospects for additional stimulus. Good news on the stimulus talks produces rallies while disappointment leads to intraday selling. From a shorter-term perspective, stocks are struggling due to the lack of a deal between the White House and Congress. As such, the pullback from the recent highs makes sense (well, to me anyway). But from a longer-term perspective, I think the market is pricing in a Biden win, which is thought to produce a larger stimulus deal than is currently being discussed. But given the ongoing uncertainty, the current consolidation could easily continue until the results of the election are finalized. And as I detail below, my plan is to continue to buy the dips.
The State of the Trend Indicators
Although the Trend Board has downticked a bit since our last update (in response to some weakness in the short-term trend indicators), it remains in good shape in pretty good shape overall. And given that the momentum indicators are confirming with the board sporting a healthy dose of green (more below), buying weakness seems like the appropriate way to play.
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* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.
About The Trend Board Indicators: The models/indicators on the Trend Board are designed to determine the overall technical health of the current stock market trend in terms of the short- and intermediate-term time frames.
My Take on the State of the Charts...
Taking a quick glance at the chart of the S&P 500, I conclude that the major indices remain in what I'll call a consolidation pattern. You can think of this as a digestion phase after the big summer run the market enjoyed. I've drawn a line in the middle of the consolidation pattern, to indicate where I see near-term support. For me, this line in the sand suggests which team is in possession of the ball. I can also argue that the S&P 500 is currently tracing out a classic cup-with-a-handle formation, which tends to be bullish if the downwardly trending "handle" is broken to the upside. And as you might suspect, a break below the current support zone could easily produce additional technical selling - which, given the state of the current trade, would likely happen fast. So, while some will argue that stocks are waiting on the election and nothing substantive is going to occur until after November 3rd, I see the near-term price action as important.
S&P 500 - Daily
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Next, let's check in on the state of the market's internal momentum indicators.
The Momentum board has continued to improve since our last report. While there is still some room for additional improvement, the state of the board and the historical return based on the status of the current model readings supports the bull camp. So, unless the bears can get something going - and soon - my plan for the cash I have on the sidelines is to be looking for entry points in my favorite names.
(Click on image to enlarge)
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...
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