When you hear a tornado warning, that means conditions are right for a tornado to develop. It doesn’t mean a tornado will actually appear, but it’s a good idea to take precautions and be prepared. There are also certain times of year when the probability of a tornado appearing are higher than others, and we should pay closer attention.
The same came be said for conditions in the stock market. There are technical indicators that can signal to us that conditions are right for a potential market correction. That being said, a correction may not develop, or those conditions could develop into a minor (5% to 10%) retracement or perhaps something more severe.
Seasonality
Like tornado season, there are also certain times of year when market corrections seem to occur more—typically March and April and August and September. The weekly chart of the S&P 500 shown below reveals corrections that occurred over the last four years in both of these time frames.
Signal Confirmation
In the months before these corrections occurred, the chart shows the trend of the market was upward while the two indicators below the price chart show that weakness was starting to occur before the actual price began to fall. For reference, the RSI chart reflects the relative strength of the market, and the PMO chart reflects the momentum of the market. The blue arrows show the downward trend in both indicators except for the current level of the PMO indicator. Currently the PMO is moving sideways which is similar to the price chart reflecting a sideways consolidation phase. Meanwhile, the RSI indicator is sloping downward, which indicates the conditions might be developing for a market correction, but there needs to be more confirmation before the tornado siren goes off.
Right now, there is price support around 7300 to 7350, and if the S&P 500 were to close the week below that range, then that would add more confirmation for a potential correction along with the RSI.
Conclusion
I mentioned back in my June blog post that the market could consolidate and move sideways for a while, and that is what we have seen through the summer. We are coming to the time of year when the market usually makes up its mind which direction it wants to go. Being patient and continuing to look for confirmation signals for that direction is the best course for now.
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This post is for informational purposes only. It is not intended as investment advice as each person’s financial situation is different. I strongly recommend working with a financial advisor who can deliver current information to you quickly and offer help with sorting through the various investing options.
Bret Wilson is a Financial Advisor with Wilson Investment Services, LLC based in Rockwall, Texas.