Last week’s late sell-off in the stock market raises the question of whether it presents a buying opportunity. Evidence that the market has reached a point of buyer exhaustion suggests otherwise. While a recovery soon wouldn’t be surprising as momentum traders cover short positions, the risk of deeper losses in the near term suggests position traders would do well to avoid stocks for the time being.
The indicator at the bottom of the weekly chart of the S&P 500 is moving averages applied to the relative strength index (14-week). As you can see, higher prices in January coincided with a lower peak in the fast RSI average while above the 70 overbought threshold. Even without the indicator, the price action alone shows that higher highs didn’t extend very far before sellers took charge.
There isn’t sufficient evidence to assume a significant topping process has begun. So it’s too soon to make any lofty assumptions about the health of the primary uptrend since 2009. Suffice it to say, it’s a good time to step aside or look to trading opportunities in other markets.
