Buy the Dip Mode

Premium Section: New Uptrend Scan (AAPL, GOOGL, TGT, CRM, DELL, BABA, TLT)

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This week we’ll go over market conditions and then scan for emerging uptrends on the weekly chart in the Premium Section.

Market Conditions: Early Dovish Policy

Let’s sum up the market’s mind in one sentence: we are in an early dovish Fed environment, with rising liquidity, evidence of inflation reduction, and no substantial signs of a recession yet. From a Macro point of view, there is every reason to be bullish.

On top of that China took major steps to restimulate it’s struggling economy. By reducing interest rates and easing bank requirement regulations, they are expanding liquidity. This should benefit both the Chinese stock market and the global economy.

Let’s turn our attention to the S&P 500 (SPY) and market internals. SPY is in an uptrend, trading above the 9 (pink) and 21 (blue) Exponential Moving Averages. Breadth is strong, with net new highs and the McClellan Breadth Oscillator above 0. While this suggests a healthy market, the VXV/VIX (medium-term VIX/1-month VIX) hit 1.20 and reversed lower, indicating short-term volatility is too low, often leading to a consolidation or a pullback. Additionally, the Equity Put/Call Ratio's 5 Simple Moving Average appears overheated, which usually precedes a pullback. Finally, price is finding resistance at the Upper Bollinger Band (gray), which often leads to a pullback to the Bollinger Band Midpoint at $560 or the Lower Bollinger Band around $544. In summary, the market is healthy but overstretched.

Looking at the NYSE Advance/Decline line, it is currently overbought, with the RSI showing bearish divergence as the MACD prepares for a bearish crossover. Although it remains in an uptrend, there is a pattern of pulling back to the 20 SMA (green dotted line), which is possible over the next few trading days.

Smart Money appears to be expecting a short-term pullback as they are reducing long equity exposure in a hurry. Dumb Money continues to buy.

Looking at the 1-hour chart of SPY, there is a pattern of gapping up and then selling off, likely indicating that smart money is taking profits at the highs. The 21 EMA on the 1-hour chart has been holding, but with multiple touches, a breakdown seems imminent. If the price breaks below $570, the next support is at $568, aligning with the 9 EMA on the daily timeframe. If that fails, the AVWAP from September 11th at $565, along with the breakout point at $563.91, forms a support zone. Below that, $562 is a confluence zone between the 21 EMA on the daily and the AVWAP from September 6th. Finally the uptrend line around $559 (shown later) should hold. If this level doesn’t hold, a larger correction is likely.

The Fear & Greed Model shows that the market is currently experiencing extreme greed, which leaves it vulnerable to potential turbulence.

Our cycle bracket for SPY points to some pullback or consolidation until around October 7th. We expect this uptrend line around $559 to stay intact. As long as this uptrend line holds, we believe it is a good idea to deploy capital and buy the dip.

Next week is a pretty busy week on the Economic Calendar. Nonfarm Payrolls and the Unemployment Rate on Friday will be the key. A higher Unemployment Rate could weaken the Economic Soft Landing narrative and drop the market. A stable Unemployment Rate could be a “nothing burger”. A lower Unemployment Rate may bolster the market.

Conclusion

The market is healthy but extended. As we enter October, which is known for its bearish seasonality, the odds of a pullback or consolidation increase. Look for technical oscillations lower as opportunities to add equity exposure. Focus on stocks and ETFs with a bullish price structure that offer good risk/reward potential. And always manage your risk carefully.

Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.