’This is an oversold bounce:' strategist on market rally

Yahoo Finance’s Kristin Myers and Chris Vermeulen, TheTechnicalTraders.com Founder and Chief Market Strategist, discuss the latest market volatility.

Video Transcript

KRISTIN MYERS: But let's chat more about this market rally. As I had mentioned earlier in the show, best two days since June. So for more on this, we're joined now by Chris Vermeulen, technicaltraders.com founder and chief market strategist. So, Chris, I was looking at your note a little bit earlier today, and it said that, quote, "time heals all wounds." So in your mind as you're looking at the markets, you're seeing this rally, do you think the market correction is over?

CHRIS VERMEULEN: I think the market has a little bit of work to do. I mean, we're a little oversold, believe it or not. Last week, we saw some real panic in the stock market. People were really liquidating everything. And I think finally people kind of put aside the pessimism from last week. There's-- they had some time off over the weekend, and now people are kind of stepping back in hoping the market is going to find the bottom here and rally.

And-- and some of the biggest beat up sectors last, well, really over the last couple months have been financials, energy, two of the strongest sectors today. And sometimes the most beat up are the ones that have the biggest bounces. So it's going to be interesting to see where these big powerhouse sectors go. But at this point, this is kind of an oversold bounce. We need to see if it's going to have some legs to go any higher here.

KRISTIN MYERS: So to that point, because I want-- I'm curious to know in your mind how much bounce-back we're going to be seeing, how much legs this-- or how many-- how much power this rally is going to be having. In just a couple of weeks, we were-- you know, just a couple of weeks ago, right before this downward spiral, that four-week spiral, we were talking about record highs. Do you at all think that we could see some-- sort of quick snapback and recovery that the markets are going to start challenging those record highs again?

CHRIS VERMEULEN: Yeah, it could be. I think the markets are at a really critical turning point this week. If you look at those major sectors-- financials, technology, energy-- they've all broken below their key kind of 20- and 50-day moving averages. Today, they're having a-- kind of a big bounce, a gap off a big move, and now they're coming up underneath those key moving averages, which typically act as resistance when you're under them. So the market's having this strong gap.

Gaps in markets tend to get filled. So the-- the fact that we closed lower on Friday and opened sharply higher today, we could see the market fade back down. I think it's going to be a little bit of a volatile week. We need to see if we can hold above the 50-day moving average by the end of the week, because if we don't, I think we're actually going to see a couple more weeks of sideways to lower price action just based on the current momentum. So this 50-day moving average, very critical this week.

KRISTIN MYERS: So to that point, because again, want to look over at your note, we're seeing cyclicals leading the way today. Your note, however, saying when we look at that 50-day moving average, that their performance isn't a good sign for the market. Talk us through that.

CHRIS VERMEULEN: Yeah, so the-- the big problem is, they're in a downtrend, and this is nothing more at this point as just a bounce. And so I mean, on a short-term technical standpoint, the market actually gapped into resistance. It's overbought, and it-- it's pointing to lower prices. So the fact that these-- these cyclical markets are trending lower, trends usually continue in the same direction than they are to reverse. So at this point, I think this bounce is probably going to get sold into, and we really need to be cautious.

It's interesting because the volatility index is trading slightly positive or flat today. Considering the stock market is up so big, the VIX should be collapsing and dropping. And we saw this happen a couple of weeks ago just before the market had a-- a big bout of selling, where the VIX moved up with the stock market. So that means there's somebody-- there's a lot of big players buying downside protection. They expect volatility is going to climb, and so people are protecting themselves.

And so on a short-term basis, I'm a little bit bearish that we're going to see a couple of weeks of price struggle here, and I think it'll get people pretty stressed out, as what happened last week. And this is what the market normally does. It likes to shake things up, let everyone panic, and that's when it puts in a bottom, and then we could go back up. And I do think we could go and test those all-time highs again.

KRISTIN MYERS: I want to ask you now about stimulus. It's a thing that we keep talking about. Those negotiations have completely stalled. We are, of course-- it's-- it's now almost October. We are heading into the holiday season. The consumer being very important over the last couple of months. If we don't get a stimulus, if Congress can't seem to get some sort of deal together, what do you think we're going to be seeing in November and in December as really that holiday shopping really starts to pick up?

CHRIS VERMEULEN: Yeah, I-- I think-- and without that stimulus, I think-- I think it could be a-- a little bit of a dreary kind of season. I mean, a lot of people are counting on some type of stimulus plan. It just never seems to come. And I think it's going to be very kind of hot pocket type of sector where certain sectors are going to do really well, like transportation, like shipping, like FedEx.

We're getting into that season where we're going to-- you know, especially with COVID starting to kind of flare back up, I mean, we're looking at UPS and-- and FedEx, these types of companies are just going to clean up, Amazon. So, I mean, we're going to be stuck with a lot of online shopping.

But, I mean, we need some type of stimulus plan to help the unemployed, to help businesses struggle through these times because, you know, there's so many companies are just burning through their savings or their loans that are interest-free or delayed, but that can only go on for so long. So things are going to be choppy, very uncertain. We need a stimulus plan. And having the elections right around the corner just adds a whole new level of stress and uncertainty.

KRISTIN MYERS: Chris, before I let you go, I-- I have to ask about the elections. We have a presidential debate tomorrow night. The elections are 36 days away. What do you think the markets-- or how do you think markets are going to be reacting over the next couple of weeks?

CHRIS VERMEULEN: Yeah, it's-- it's going to be a rollercoaster ride. I mean, it's a real kind of battle there going on. And without a clear direction of who's going to-- who's going to win, this market, I think, is-- a lot of big money is going to be holding off. And as we get closer into the election, I think we could see more money kind of back itself out and go to cash and try to protect itself.

But I think there's going to be a huge move as soon as there is election, somebody wins, it's going to be, I think, a big market move. Which way, we don't know. But at this point, the market still has money moving into it. These dips are being bought. And right now, we're just seeing an oversold kind of market condition here, where I think the market is going to chatter, potentially go up, test those highs. But I don't think we're going to break into new highs until there is an election, until there's a result there.

KRISTIN MYERS: All right, Chris Vermeulen, founder of the technicaltraders.com and chief market strategist, thanks for joining us today.

CHRIS VERMEULEN: Thanks for having me, Kristin.