The S&P 500 just flashed a 'buy' signal that could mean an oversold rally is on the horizon, Fairlead Strategies' Katie Stockton says
- The S&P 500 just flashed a technical "buy" signal, according to
Katie Stocktonof Fairlead Strategies.
- The positive move in the S&P 500's MACD indicator suggests an oversold rally could materialize.
- "This reflects significant improvement in short-term momentum despite the day-to-day volatility that we have been suffering through."
The buy signal, which is based on the moving average convergence divergence indicator, or MACD, represents the first buy signal since mid-March for the S&P 500, and ends the "sell" signal that flashed in early April. Both of those prior signals worked well for short-term traders, with the S&P 500 jumping as much as 8% after the mid-March buy signal, and the S&P 500 falling as much as 13% since the April sell signal.
The MACD is a trend-following momentum indicator that technical analysts use to show the relationship between two moving averages of a security's price. A signal line is plotted, which can function as a buy and sell signal. Stockton uses MACD to capture momentum and trend across multiple timeframes. The indicator appeals to her because it's very black and white, generating either a buy, or a sell.
Combined with a recent DeMARK counter trend signal, Stockton said the recent MACD buy signal could drive an oversold rally in the S&P 500 to 4,200, which represents potential upside of about 6% from current levels.
But the recent buy signal isn't an all clear for traders to jump back into stocks, according to Stockton. Nor is there a clear signal for investors to use an oversold bounce as an opportunity to start shorting stocks. "Our review of the constituents of the S&P 500 yielded few high-conviction setups, long or short," Stockton said.
Essentially, stocks are in a no-mans land environment as a lot of technical damage has been done where it's hard to go long, but stocks are also down so much that shorting them now might not offer a good entry point for traders.
"We are not keen on adding counter-trend long exposure without additional support discovery, and most stocks are too oversold for us to feel like we have a good entry for short selling," Stockton said.
To get long, traders would at the very least like to see a series of higher lows in the S&P 500, combined with resistance at 4,200 decisively turning into support. But until that happens, heightened volatility in the market is likely to remain.
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