U.S. Stock Market: What's Next?

On Thursday, October 2nd, I wrote a special update after daily chart buy signals were triggered in approximately 15% of the 500 stocks and indexes that I monitor with my computer trading system. When stocks bottomed intra-day on Thursday, the S&P 500 Index had corrected 4.6% top-to-bottom from its September 19th intra-day high while the Russell 2000 Index had corrected 11.2% from its record high as posted in early July. 

In my update on Thursday I elected to follow the signals of my computer trading program and NOT my fundamental research or technical analysis which still strongly suggests that a major bear market is either already underway or will be soon. I am not sure who first hollered the famous words "Don't fight the tape!" (maybe Jesse Livermore?), but "the tape" was clearly bullish late Thursday, October 2nd. And my computer trading software is designed to read the tape for possible significant changes in direction, hence the abundance of short term buy signals that day.

Even though I have had an exceptional year so far in 2014 (among my best ever) by mostly following my computer trading system, I hate this market, what can I say! Maybe I just don't understand it and that's why I hate it. It's only natural for me to want my fundamental and technical research to provide direction that is consistent with my computer trading software. However, it doesn't always happen that way, and that's when it gets frustrating! As is the case now!!

Gold/Silver mining stocks, my biggest winners over the past 16 months, have been decimated once again since their summer highs. Some of my favorite issues are down between 30% and 50% over the last 8 to 10 weeks. Fortunately, I haven't had the necessary buy signals (or the personal itch) to bottom-pick in this unloved group on this latest downturn. This past Friday was yet another day of wholesale liquidation in most of these stocks, but I would like to see consistently positive tape action before accumulating shares again here in this volatile sector.

In the S&P 500, I feel like I've temporarily lost my way. Last Thursday's daily chart buy signals seem to come out of nowhere. And they were everywhere (big cap, small cap, mid cap, everywhere)! However, even after Friday's huge single-day gains (SPX +1.12%, DJIA +1.24%, and DJTA +2.12%), I just can't see an upside breakout that represents any meaningful percentage advance from here. My current view is that we are witnessing a vicious short-squeeze that could take the Nasdaq Composite and the S&P 500 Index near their all-time record highs, but then DOWN hard again with conviction, volume, and duration!

While the very short-term trend may be up for now in the U.S. Stock Market, here is the chart that tells me that a major bear market has already begun or will soon be underway:

Russell 2000 Monthly Chart with Computer-generated Buy & Sell Signals