A Recovery in the S&P 500 Is Probably Closer Than Most Think

It seems like just last week investors were celebrating all-time highs in stocks, progress on the Chinese trade deal, Fed rate cuts, better-than-expected earnings, and a solid jobs report. At the time, there was a good argument that all the good news had been priced into the market and as we now know, that was absolutely the case.

If there is one thing we have learned over the years it is sometimes the best times to be a bear are when the masses are complacently bullish. Further, the best time to be a bull is often when others are pessimistic.

In recent weeks, we've seen the market go from one extreme to the other. The CNN Fear & Greed index has shifted from a reading of "extreme greed," to that of "extreme fear."

In late July, we wrote about what we believed to be an imminent correction in the stock market. The analysis was also featured on CNBC's Mad Money with Jim Cramer (you can view the archive here). At the time, our chartwork was anticipating corrective action somewhere between 3,000 and 3,030 in the E-mini S&P 500 futures with an initial target of 2,750.

Source: QST

The overnight low for the S&P 500 for Monday's session was near 2,775, not quite the bottom of the trading range we were hoping for (2,750) but close. We see this as a sign the correction could be nearing an end or perhaps that was "it."

Unfortunately, we never know where the bottom is until we know and at that point, it is too late. Also, the market couldn't care less about trading targets nor should traders forget trading involves target ranges not prices. In other words, we shouldn't get too caught up if the S&P 500 bottoms at 2,775 or even 2,735. Either of these prices is sufficient to complete the technical pattern of testing trading range lows.

Remember, this is an art, not a science.

Market pullbacks are volatile and treacherous, so caution is warranted. In fact, we see a relatively probable chance the S&P 500 not only retests those overnight lows but makes a moderately lower low (somewhere between 2,750 and 2,735). Should those prices be seen in the coming sessions, the market could stabilize and resume its rally. Nevertheless, traders should adjust their mindset accordingly.

Last month we believed traders were best served being bears on runs above 3,000, but now we believe traders should be looking to get bullish on large dips, preferably in the mid-2700s if the opportunity presents itself. That said, markets in a trough are far more volatile than markets near a peak, so positions should be mindful of risk tolerance. For instance, if 2,750 support gives way the bulls have a chance to defend 2,700 but beneath that, we are looking at long-term trendline support levels of 2,550 and 2,470.

The good news is that markets go down faster than they go up; while these prices seem distant in price, they aren't necessarily distant in time. So, the pain of being "long and wrong" could be severe but it generally isn't prolonged.

At the time of publication, Garner had no positions in any securities mentioned.

*There is a substantial risk of loss in trading commodity futures, options, ETFs. Seasonal tendencies are already priced into market values.