Quite an eventful period since the last Stock Trading Alert on Sep 11 - stocks rose both on Sep 14 and 15, validating the short-term bullish outlook presented in the said Alert. Next, the S&P 500 made two downswings before rebounding from the 3200 level proximity on Sep 24. Friday's session brought us a daily upswing, and so did Monday. Where does yesterday's stumble fit in?

Volatility has been moving generally lower after making a lower high days ago. Technology plunged but didn't make a new low on Thursday. Otherwise, there have been few sectoral bright spots, with financials and energy still looking precarious. On the bright side, consumer discretionaries, utilities and consumer staples (the latter two are defensives) have held up reasonably well - better than healthcare.

But what moved the markets when it comes to headlines? Political uncertainties remain, the first presidential debate is over, and there is still no stimulus bill, while corona is getting worse overseas. New lockdowns are hanging in the air, with the U.K. and Israel leading the way. Then, the Fed hasn't done all that much lately, leaving the credit markets relatively unfazed. Continuing claims are trending lower only painfully slowly, and U.S. tensions with China haven't seen a turnaround.

So, are we witnessing a typical pre-election correction? I think that's most likely the case. September brought us a bigger storm than October based on the 2016 experience would, and it's reasonable to expect the remaining S&P 500 downside (unless the current upswing turns into a dead cat bounce) to be relatively modest.

Let's check the charts' messages.

S&P 500 in the Medium - and Short-Run

I'll start with the weekly chart perspective (charts courtesy of http://stockcharts.com ):

Stocks plunged all the way to the lower border of the rising black trend channel, and subsequently rebounded. The lower knot of last week's candle and the upper knot of the week in progress, hint at a short-term indecision. The weekly indicators support the notion of not that much downside left in this correction.

Let's check the daily chart whether it supports my assessment or not.

Having visited the 3200 level, S&P 500 futures rebounded, but the volume isn't totally convincing. That makes the recovery less credible. On one hand, there hasn't been a selling climax thus far yet, on the other hand unless momentum and volume pick up to the downside, any potential second local bottom would be made on lower volume (or, prices would insitead consolidate sideways before another leg higher).

Either way, the bulls are in a slightly more advantageous position now. That's especially so given the smaller volume of yesterday's daily stumble.

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) have rebounded, but the weak volume is a cautionary sign. In my opinion though, it's more likely than not that Thursday intraday lows would hold. Examination of investment grade corporate bonds (LQD ETF) though still warrants short-term caution, until resolved.

A glance at both leading credit market ratios - high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) - highlights that perfectly. LQD:IEI hesitated yesterday in what appears to be a daily pause. Again, I don't see a break below either's local lows as my go-to scenario at the moment.

Finally, let's check whether stocks are extended relative to the HYG:SHY ratio, or not. And they are. Or is it that stocks are leading higher? Both points are true in my opinion right now, and I look for stocks to facilitate the HYG:SHY ratio's eventual upswing. Yes, that means I see quite limited downside potential in stocks.

Summary

Summing up, stocks have rebounded from a relatively protracted local bottom, and appear ready to gradually assume trading with a bullish bias again. Market breadth indicators appear favoring the bulls with each passing day without a profound downswing that would pull the advance-decline line dramatically lower.

The U.S. dollar has met its fair share of short-term selling pressure, and unless the bulls assume the initiative and overcome the September peak, I'm not looking for risk assets to get under too much pressure.

Cautiously bullish outlook is warranted, and the bulls that have been waiting on the sidelines for the dust to clear up, wouldn't be hurt by exercising patience in the lookout for a more favorable short-term entry point than is the case this very moment (S&P 500 futures at 3318).

Thank you for reading today's free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

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There will be an approximately two-week break in the regular publication of Stock Trading Alerts.

While trading decisions are ultimately for each investor and trader to make, it seems that in light of the above, it would be a good idea to close any remaining positions in stocks (there was an open position as of Friday).

We apologize for this inconvenience, and we sincerely hope that the profits you made thanks to our Stock Trading Alerts in the previous weeks and months will make this short break endurable. Once again, we’re sorry for this inconvenience and we thank you for your understanding and patience.

Thank you.
Przemyslaw Radomski, CFA

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Rocky, as in Rocky Balboa. Even if knocked down, rising to settle the score. Yeah, the bulls are made of steel - that's still my opinion after looking at dozens of charts, and scrolling down the headlines.

Assessing the outlook yesterday, such were my observations:

(...) Is the sharp correction over now? Thus far, my answer remains the same as yesterday - in terms of prices, the worst is likely behind us, in terms of time, we have a way to go still.

And here we are, with stocks at the crossroads again. Deja vu or not? Let the charts speak.

S&P 500 in the Medium - and Short-Run

I'll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

While prices reverted back to the rising black trend channel, the volume appears to be drying up. The current week looks like to be marked with lower volume than preceding week's reversal, and unless the bears force a dramatically lower close today (hint: I don't see that as likely to happen), the selling wave would appear to be running out of steam, and stocks nicely set up for an upside reversal next.

The caption says it all, and the implications are leaning bullish, if ever so slightly. Naturally, the bulls have to step in here, and erasing a sizable part of yesterday's downswing, would be a good start.

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) are painting a more cautious picture though. On one hand, the ETF trades well above Tuesday's lows, on the other hand, yesterday's downswing happened on sizable volume. Investment grade corporate bonds (LQD ETF) don't offer many clues, as they went practically nowhere.

Long-dated Treasuries (TLT ETF) keep on trading sideways to down in recent weeks, and yesterday's upswing doesn't change that one bit. The current price action doesn't pose a challenge to the slow economic recovery and Fed's inflationary moves.

The stocks to all Treasuries ($SPX:$UST) ratio reveals the strain stocks are under at the moment. Still, they have not broken down deeply enough so as to justify my call for a shift in risk-on sentiment. Yes, it's being mightily tried right now, but this is not a reversal yet - just a regular correction that is less steep than the early June one.

S&P 500 Market Breadth and Technology

The daily advance-decline line offers an encouraging view. I see high likelihood for a short-term bullish divergence to be made today, fully in line with the hidden bullish signs since the previous Friday that brought us not too few advancing issues.

Technology (XLK ETF) is still very much at a short-term crossroads, but the potential for upside resolution is growing in my view - thanks to the declining volume. The chart though isn't bullish in and out of itself in the very short run - the bulls aren't catching breath exactly, and the sector is losing steam vs the value plays, relatively speaking.

Such were my yesterday's notes on the relative performances:

(...) Yes, that's what rotation is about, and the fact that it's happening, and money isn't moving out of tech to the sidelines or into Treasuries, but instead to value plays, attests to the stock bull being alive and well.

Semiconductors (XSD ETF) provide the bullish gem to uncover. Having finished farther above Tuesday's lows, with yesterday's downswing powered by lower volume, this leading segment of the leading sector wants to give benefit of the doubt to the bulls.

Dollar, Metals and Oil

The dollar bulls just can't and can't catch up short-term breath. Barely recovering from yesterday's downswing attempt, they're wasting precious time to reach up beyond the 50-day moving average. The advantage of bullish divergences in the daily indicators, is slowly but surely being lost.

Gold appears in the mood to peek higher regardless of the short-term dollar strength. Its peek shouldn't be interpreted as a breakout above the bullish consolidation next, but as an encouraging, very short-term sign of risk-on appetite.

Copper took it on the chin, but recovered approximately half of the intraday plunge. The chart's posture remains bullish, and that's key for the economic recovery.

The oil ($WTIC) chart still looks distinctly bearish, but the downswing appears set for a short-term consolidation, giving the bulls a chance to recoup some of their recent losses. But more than the would-be improved price readings, is required. Looking at the deeply oversold daily indicators in need of stabilization, oil bulls have a way to go still. But in the short-run, the oil reprieve would help stock bulls surprise on the upside.

Keeping in mind yesterday's big picture:

(...) Black gold's prices look to be underperforming stocks early on (canary in the coal mine) - just as they were at the beginning of 2020 - which highlights the very real possibility of a stormy not merely September, but also October.

Summary

Summing up, the stock upswing gave way to heavy selling yesterday, but hope is not lost for the bulls. Well, hope - who trades hope? The many signs keep pointing to stock upswing reasserting itself relatively shortly.

Should the area below Tuesday's lows be broken, that would lead me to reconsider the bullish short-term outlook with September still having a chance of closing in the black. Given the real world challenges though, I look at seeing a sizable lower knot on the September monthly chart as the base case scenario, and will let the bulls surprise me with steeper gains, if they can mount that power.

The key point is that the array of forces favors the bulls, and that risks are skewed to the upside once this healthy but volatile correction runs its course.

Thank you for reading today's free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

• Read more