Short-term Momentum Indicators Show Bottoming Signs

In addition to studying price moves, there are two simple technical indicators I focus on to build a technical view of any market or security. My goal is to select indicators that can help address the question most investors and traders face which is are markets or securities at a turning point, and if so, is there a shift in leadership?

Momentum indicators, such as RSI, MACD, stochastics and many others, help identify extremes and turning points in the market, and relative performance versus the S&P 500 helps identify shifts in leadership within the market.

Today, I’m focusing on momentum indicators because both the long and short-term momentum cycles that are important things to watch. First, our longer-term cycle work continues to suggest the March lows defined another 4-year cycle low right on track from the prior cycle low four years ago in Q1 2016. Weekly momentum indicators, which help track 1-2 quarter shifts, are still building positively from the oversold levels reached in March.

While they are no longer early in their up move, they have yet to reach overbought levels or to peak. Lastly, and the reason for today’s note, short-term indicators, tracking 2-4 week shifts, are showing early signs of bottoming after peaking in overbought territory two weeks ago. Interestingly, the timing of another short-term bottom coincides with this week’s option expiration which is an event often defines turning point for markets.

In my note last Friday, I discussed the likelihood equity markets in general, and social distancing stocks, such as airlines, casinos and cruise lines, specifically, were likely nearing trading lows. During the past week, the S&P has bounced from first support near its 200-dma which is above two other key support levels. (See chart below.)

Short-term Momentum Indicators Show Bottoming Signs

The first is its 50-day moving average at around 2952 which is just above the 62% retracement of the Q1 decline at 2934 followed by the 50% retracement just below 2800.

Despite this Friday’s Apple related pullback, I continue to expect the S&P will hold that broad band of support. The daily momentum indicator in the top panel is noteworthy given they are showing very early signs of bottoming after peaking two weeks ago. My expectation is that these daily indicators should turn up heading into mid-late next week, supporting another upside move in equities into early to mid-July.

Figure: Weekly Sector Review
Source: FS Insight, Factset

Short-term Momentum Indicators Show Bottoming Signs

Figure: Best and worst performance sectors over past 3 months

Short-term Momentum Indicators Show Bottoming Signs
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