Imagine if someone threw the stock market into a time capsule and set the coordinates back in time to January 29, 2020.
Actually, you don’t have to imagine it… Because that’s what seems to have happened. Conditions aren’t just “sort of” similar to this time last year…
Take a look at this chart of the S&P 500…
After a relentless, three-month-long rally, the S&P sold off some last week. It finished the final trading day of January right on its 50-day moving average (MA) – the blue line. (Moving averages are trend-following indicators used in technical analysis to smooth out price action.)
That’s exactly how it finished in January of last year as well.
And, if that isn’t odd enough, all of the various technical conditions at the bottom of the chart look exactly the same as last year too. That’s weird, right?
But, hold on. Take a look at this chart of the Volatility Index (VIX)…
The VIX measures investors’ expectation of volatility over the next 30 days. It’s often called the market’s “fear gauge.”
While the VIX is trading at a higher level than where it was at last year, the price action is the same. The VIX spent two months chopping back and forth inside a tight trading range. Then, it exploded higher last week.
The VIX closed above its upper Bollinger Band (BB) on Wednesday. (Bollinger Bands are often used in technical analysis to determine overbought and oversold market levels.)
Then, it closed back inside the bands on Thursday – generating the first “buy” signal of 2021. But, that buy signal failed when the VIX closed above its upper BB again on Friday. So, now we’re setting up for a rare double-buy signal from the VIX.
That’s what happened last year, too.
Finally, check out these charts of the McClellan Oscillators (NAMO for the Nasdaq and NYMO for the New York Stock Exchange)…
These oscillators show the difference between the number of stocks advancing and the number of stocks declining. If the number goes up, more stocks are participating in the broader bullish trend – and vice versa.
Both of these indicators closed Friday below their lower BBs, and below the -60 level, which indicates an oversold condition. They also closed exactly where they closed at the end of January last year.
So, what does this all mean?
Well, there’s good news and bad news…
The good news is the stock market is now oversold enough that traders can start looking for a bounce. And, it won’t take too much buying pressure to lead the market to new all-time-highs just as it did last February.
The bad news, of course, is that if the similarities to last year continue, then the next rally is likely to create negative divergence on all the various momentum indicators and set the stage for a much more significant decline later this month.
Because that’s also exactly what happened last year.
Best regards and good trading,
Editor, Jeff Clark’s Market Minute
P.S. Spotting momentum indicators and understanding technical analysis usually intimidates most traders. I can’t always predict the future, but I can understand the signs in the markets – and how they can make me money consistently – and teach you to do the same.
I’ve been using this simple strategy for over three decades to quickly make money using just three stocks over and over again. Read all about it in my 3-Stock Retirement Blueprint, and how it could help set you up for a comfortable retirement like it did for me.
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