The broad market is rapidly approaching an intermediate bottom that could offer the best buying opportunity since 2016. However, it's important to wait for lower volatility and bullish relative strength cycles, or traders risk getting cut to shreds while market players work out new levels of interest. Even so, it isn't too early to build a shopping list of your favorite names and set aside some cash, waiting for the perfect time to take exposure.
Major reversals unfold through price and time, but these elements are rarely in perfect alignment. In other words, a major index can reach long-term support but take weeks or months pounding out a bottom before relative strength cycles turn higher, allowing rapid price appreciation. Conversely, important cycles may cross from bearish to bullish while an underlying security is still grinding out new lows, forcing time to wait for price to play catch-up.
The S&P 500 Index, Apple Inc. (AAPL) and other major instruments have reached their 50-month exponential moving averages (EMAs), a long-term support level that is very hard to break after years of higher prices. Fibonacci retracements are lining up as well, indicating that the three-month decline has reached a critical turning point. However, intense momentum and high volatility warn that cycles won't turn without a testing process that could take weeks or months. As a result, buying signals won't go into effect until relative strength cycles cross to the bull side, in convergence with achieved price targets.
S&P 500 Working Toward Cyclical Low
The SPDR S&P 500 ETF (SPY) bottomed out at the 50-month EMA near $180 in 2016 and turned higher, breaking out to new highs following the presidential election. The subsequent advance unfolded through an Elliott five-wave pattern that topped out near $300 in September 2018. Aggressive sellers then took control in a vicious decline that reached the moving average once again earlier this week.
The 2011 correction reversed near the 50-month EMA as well, raising the odds that the S&P 500 is at or near a significant bottom. However, the monthly stochastics oscillator is engaged in a major sell cycle that still hasn't reached the oversold level. That isn't necessarily unusual because the index hasn't hit that extreme reading since 2009, but other technical factors are also telling us to wait for time and price synchronicity.
The black trendline of lows going back to 2009 also ended 2011 and 2016 corrections, suggesting that this downturn will reverse closer to $225, which also marks the .618 Fibonacci retracement of the 2016 to 2018 uptrend. The 10 or so downside points needed to get there could drop stochastics into the oversold level and generate a two-sided tape that establishes a new long-term buy cycle within one to three months.
Rare Apple Buying Opportunity
Apple stock has reached a price level that should offer a long-term buying opportunity, but time is misaligned as well, delaying the requirements needed to take exposure. Shares of the tech giant posted major bottoms at or near the 50-month EMA in 2009, 2013 and 2016, and the stock is situated just a few points above that level this week. In addition, the .618 Fibonacci rally retracement is perfectly aligned at the moving average, adding a healthy layer of hidden support.
However, cycle activity isn't cooperating because the monthly stochastics oscillator is engaged in a brutal sell cycle that hasn't reached the oversold level yet. In addition, the indicator's vertical trajectory matches bearish price momentum, raising the odds for an overshoot of technical support levels, wiping out stops of overeager bulls. At this point, a blast into the oversold zone matching 2009 and 2013 extremes may be needed to complete long-term buying signals.
The Bottom Line
The S&P 500, Apple and other widely followed instruments have reached or are quickly approaching intermediate bottoms, setting the stage for powerful 2019 recovery waves.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.