Weekend Stock Market Outlook

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Stock Market Outlook For The Week of
February 2nd = Downtrend

INDICATORS

ADX Directional Indicators: Downtrend
Price & Volume Action: Mixed
Objective Elliott Wave Analysis: Downtrend

COMMENTARY

The stock market outlook switched over to a downtrend early last week, as markets reacted to uncertainty surrounding the coronavirus pandemic.

The ADX directional indicators crossed over twice, and OEW shows a downtrend underway. The index is less than half a percent above the 50-day moving average, but the levels of institutional selling were really high. 5 of the last 10 trading days were distribution days!

Technical analysis of daily SPX prices

2020-02-02 - SPX Trendline Analysis - Daily

The price channel failed last week as well. But even with all the selling, the S&P500 hasn't crossed its 50-day, and remainis 7% above the 200-day moving average, as well as that July-October trendline.

Technical analysis of weekly SPX prices

2020-02-02 - SPX Trendline Analysis - Weekly

There's a possibility that prices find support at the 50-day, and the sell-off is already over. The Chinese government has pledged $22 billion to prop up their market, which many hope will east the sell off.

But Chinese equity markets have been closed since Jan. 24, and they're expected to reopen deep in the red tomorrow. You may hear "knee-jerk response" a lot from the talking heads, but that doesn't make it feel better when you're the one getting kicked.

While the pandemic was unexpected, the reaction by financial markets wasn't. With millions of people affected personally and professionally, there will be an economic impact. We don't know how large that impact will be, or how long it will take to recover. This uncertainty creates a fear of losing money, which drives behavior in the near-term; investors reduce their risk of loss by reducing the money they have in areas with high uncertainty.

What can you do? Adjust.

Until we have better answers to "how big" and "how long", fundamental analysis won't be really accurate, forcing investors to guess what will happen when. Prices will be volatile. Technical analysis can give you a summary of behavior...kind of like an EKG. Watch the charts and pick your spots.

    The reason this site covers the "process" rather than a single analysis technique is for situations like this; different times call for different methods.

The good news out of all of this? Mispricing.

Benjamin Graham once said that in the short term the market is a voting machine (measuring which companies are in/out of favor), while in the long term it is a weighing machine (measuring the value of a company).

The downtrend tells us the votes are in and stocks are out of favor. The longer we're in a downtrend, the more mispricing occurs. That means that companies with solid financials and good long term prospects will see their shares sold along side companies with weak financials and poor long term prospects. People will throw the baby out with the bathwater.

So long-term, they'll still weigh the same, so to speak, just be on sale. I, for one, would be very happy to buy a bunch of dividend kings at a discount!

Best to your week!



If you find this research helpful, please tell a friend. If you don't find it helpful, tell an enemy. I share articles and other news of interest via Twitter; you can follow me @investsafely. The weekly market outlook is also posted on Facebook and Linkedin.

Charts provided courtesy of stockcharts.com.

If you're interested in learning more about the relationship between price and volume, or how to find and trade the best stocks for your growth strategy, check out this book on Amazon via the following affiliate link: How to Make Money in Stocks: A Winning System in Good Times and Bad. It's one of my favorites.

For the detailed Elliott Wave Analysis, go to the ELLIOTT WAVE lives on by Tony Caldaro.

Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.


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