The End is Near?

Igor Manukhov - Oct 27, 2023

The market is getting too negative, however the silver lining is that the negative momentum is slowing down. That tends to signal a relief rally of some sort. Do not sell.

The markets continue to selloff but despite a pretty negative headline number, things are not too bad under the hood. One important principle of the trend is that price, momentum and participation of individual stocks should agree with each other. For example, when the market moves up, you want most stocks to participate in the rally and carry the overall index, you also want price momentum to either expand or at least stay relatively constant. That is what fuels a continuation of the trend. There is a real possibility of trend reversal when price, participation and momentum do not support each other. It’s like having a great assembly of players who cannot play with one another. Its much harder to win games that way.

This brings us to the current situation. The markets clearly made a lower low this week and undercut the previous low of late September (see the black line on the top panel). However, momentum has been slowing down somewhat. Notice that both momentum indications (RSI and MACD, second and third panels respectively) have not undercut the September readings. In addition to that, there are fewer stocks now trading below their 50 day moving average than back in September, so we are possibly having not only a momentum divergence, but also participation divergence at the moment (see red lines to the right of the chart).

Why should you care? The short answer is because this kind of setup tends to lead to a rally of some sort. I have indicated previous occurrences on the chart with blue lines and orange circles. At the very least, you should not be selling when you see a setup like this. Because the moving average is still rising (purple line on the chart), we should treat this correction as a pause of the uptrend, not the beginning of a new downtrend. Historically, pullbacks like these during uptrends proved to be great times to buy.

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The End is Near?

Igor Manukhov - Oct 27, 2023

The market is getting too negative, however the silver lining is that the negative momentum is slowing down. That tends to signal a relief rally of some sort. Do not sell.

Igor Manukhov

Peter Kuntyj

Yelena Manukhova

Brittany Stone

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