S&P 500 flashes ‘buy signal’ for oversold rally

  • According to Katie Stockton of Fairlead Strategies, the S&P 500 just gave a technical “buy” signal.
  • The positive move in the S&P 500’s MACD indicator suggests that an oversold rally could be underway.
  • “This reflects a significant improvement in momentum in the near term, despite the daily volatility we have suffered through.”

According to Katie Stockton of Fairlead Strategies, the S&P 500 could be on the brink of an oversold rally after a technical “buy” signal.

The buy signal, which is based on the Moving Average Convergence-Divergence Indicator, or MACD, represents the first buy signal for the S&P 500 since mid-March and ends the “sell” signal that flashed in early April. Both previous signals have worked well for short-term traders, with the S&P 500 rising as much as 8% after the buy signal in mid-March and the S&P 500 falling a whopping 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 that can act as a buy and sell signal. Stockton uses MACD to capture momentum and trend across multiple time frames. The indicator appeals to her because it is very black and white and generates either a buy or a sell.

Combined with a recent countertrend signal from DeMARK, Stockton said the recent MACD buy signal could lead to an oversold rally in the S&P 500 to 4,200, representing a potential upside of about 6% from current levels.

But the recent buy signal is not entirely clear for traders to jump back into stocks, Stockton said. Nor is there a clear signal for investors to use an oversold bounce as an opportunity to start shorting stocks. “Our assessment of the constituents of the S&P 500 has yielded few convincing lineups, long or short,” Stockton said.

Essentially stocks are in a no man’s land environment as there is a lot of technical damage done where it is difficult to go long, but the stocks have also fallen so much that going short may not be a good entry point for traders right now.

“We’re not keen on adding counter-trend long exposure without additional support, and most stocks are too oversold to make us feel like we have a good entry into short selling,” Stockton said.

At the very least, to go long, traders would like to see a series of higher lows in the S&P 500, combined with resistance near 4,200, turn decisively into support. But until that happens, raised


volatility

will likely remain on the market.

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