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Tom DeMark, the award-winning technical strategist, says the stock market is due for a countertrend rally that will soon exhaust itself.
DeMark, who has advised investors including Paul Tudor Jones and Steven A. Cohen, told MarketWatch that last week, various major indexes recorded bottoms.
“Into their lows Wednesday, various market indices recorded daily 13 bottoms which served to offset the daily 13 tops recorded at their July highs. Consequently, stock indices are expected to retrace a portion of their prior two month decline,” said DeMark, the founder and chief executive of DeMark Analytics. See DeMark’s analysis on his website Symbolik.
He focuses on the number of days — which don’t have to be consecutive — that there was a close lower than the low of two days ago. Subject to various conditions, when the countdown reaches 13, a buy signal is triggered. (The opposite is the case on the way up.)
He said there were two equal percentage declines from the July peak to last week’s low, of about 6%, so there should be a 62% replacement of the entire decline.
“This would translate into [S&P 500] upside projection of 4,466. Other timing measures arrive at comparable upside levels,” he said. DeMark said the expected duration should be three to four weeks. The S&P 500
SPX
ended fractionally higher at 4,288.39 on Monday, but is down 7% from its July 31 peak.
He says the daily S&P 500 charge shows the index topped on Sept. 1, when its secondary high traded slightly above what he called the magnet price, which was the close on July 27, DeMark said. The low last Tuesday was the S&P 500’s trend channel lower band, he added.
DeMark said markets top not because of smart sellers but rather when the last buyer has bought, and vice versa. That means, markets rarely bottom on good news or rarely top on bad news.
He added that at times, markets are on the threshold of recording meaningful tops and bottoms, but if the required conditions aren’t met, the opportunity is lost and the process must then reset. That occurred in May, when he said the Nasdaq was on the verge of exhaustion, but then associated conditions were not met. In July, by contrast, all the conditions required for a market top were present.
