Since July, market has been going sideways to down. This downdraft has been persistent, boring and choppy. While markets are still within 1-2% of all-time highs, this choppy action has brought forward a lot of bears and helped improve the valuation measures like P/E ratios.
In fact, the true purpose of these kind of market declines/sideways corrections is to reduce optimism and lay the foundation for the next rally phase because investors get tired of the market performance.
Sentiment - Fear/Greed Indicator
CNN's fear greed indicator is suggesting that the frothy sentiment that we saw in mid July has now been replaced by lack of enthusiasm towards the market.
In fact, the sentiment is as negative right now, as it was at the time of Brexit. Therefore, we can see another sharper rally from these levels.
Signs of a Break-out
While market's decline has been choppy in nature, it is along the top downtrend trend line. One key indication of a market trend reversal would be a break of the trend line to the upside. For DJIA, this trend line is currently at 18,300.
A similar situation is present in case of SP500, where the downtrend line is crossing at 2166.
Therefore, a sustained rally of 100 points in DJIA and ~20 points in SP500 would confirm a break-out.
Overall, the markets remain in an uptrend. Market Classification Model remains in an uptrend. Therefore, there is a very high probability that we will soon experience a market break-out. Long lasting sideways action is preparing for a break-out after resetting optimistic sentiment, market valuations and technical indicators
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