Bullish Technicals Forming In The Midst Of The Correction

As is typically the case when the market is attempting to form a bottom, positive technical signs can be difficult to uncover in the midst of the bearish chatter. This time seems to be no different and the key is whether potentially positive technicals can win out in the face of some weakening fundamental factors.

The below chart shows the daily price action for the S&P 500 Index along with several technical indicators. Although the MACD  indicator line has not crossed the signal line, the MACD line (green) is nearing that cross. Additionally, the stochastic oscillator made new highs in August at a time the market was selling off. Shortly thereafter the stochastic oscillator fell below 20 on the gap lower low. Subsequent to this oversold indication, the market moved higher. Of interest in the below chart is the symmetrical pennant pattern that has formed with the market's higher lows and lower highs. A break above resistance will be important for further market upside.

From The Blog of HORAN Capital Advisors

Sometimes changing the exponential moving average settings for the stochastic oscillator can provide a clearer picture of the action in the market. The below chart uses a (5,21,5) setup. As can be seen below, this set up also shows strengthening upside momentum.

From The Blog of HORAN Capital Advisors

Investor sentiment measures are at extreme bearish levels as well. Yesterday, Pension Partners noted the Investors Intelligence Sentiment of the percentage of bulls was at its lowest level since the October 2008 reading of 22.2%.

From The Blog of HORAN Capital Advisors

Source: Pension Partners

Lastly, the 21-day moving average of the equity put/call ratio is at its highest level since late 2011. The equity put/call ratio is also indicating overly bearish sentiment and at this level the market has a history of moving higher.

From The Blog of HORAN Capital Advisors

In short, the market correction seems to be attempting to form a bottom. Of particular interest will be watching how the pennant pattern is resolved that is noted in the first chart above. A break above resistance would be an important market inflection point. With the increased influence of algorithmic trading, short term trading within the pennant is a high probability. And the market's uncertainty around whether the Fed raises rates or not this month has many investors on the sidelines until this event is resolved. In the end, some positive technical setups are forming in the face of this uncertainty that could enable the market to move higher into year end.