Technical Strategist Anticipates Countertrend Rally in Stock Market

Tom DeMark, a renowned technical strategist, believes that the stock market is poised for a countertrend rally that will soon run its course. Having provided advice to prominent investors such as Paul Tudor Jones and Steven A. Cohen, DeMark observed that various major indexes hit bottoms last week.

According to DeMark, the market indices experienced daily 13 bottoms as they reached their lows on Wednesday. This served to offset the daily 13 tops recorded at their peak in July. As a result, he expects the stock indices to retrace a portion of their two-month decline.

DeMark's strategy revolves around tracking the number of days with a close lower than the low of two days prior, without consecutiveness. Upon reaching a countdown of 13, a buy signal is triggered under specific conditions. The opposite is true for upward movement.

Based on the percentage decline observed from the July peak to last week's low, which amounted to about 6%, DeMark predicts a 62% replacement of the entire decline. Accordingly, he anticipates an upside projection of 4,466 for the S&P 500. Alternative timing measurements yield similar upside levels. DeMark estimates that this rally will last for three to four weeks.

Although the S&P 500 ended slightly higher at 4,288.39 on Monday, it remains down 7% from its peak on July 31.

Examining the daily charge of the S&P 500, DeMark identifies September 1 as the day when the index reached its secondary high, slightly surpassing what he refers to as the magnet price – the closing price on July 27. He notes that last Tuesday's low coincided with the lower band of the S&P 500's trend channel.

Another key insight from DeMark is that market tops occur not because of savvy sellers but rather when the last buyer has made their purchase. Similarly, market bottoms rarely align with positive news and tops rarely coincide with negative news.

DeMark highlights that markets sometimes approach significant tops and bottoms, but if the necessary conditions are not met, the opportunity is lost and the process must be reset. This situation occurred in May when he believed the Nasdaq was on the verge of exhaustion, but the associated conditions were not fulfilled. Conversely, all the conditions for a market top were present in July.