Chart legend Tom DeMark believes the major US stock indices could be days away from bottoming out, CNBC’s Jim Cramer said on Wednesday.
“We’re going to be in more pain before we get there,” Cramer cautioned, as he analyzed DeMark and his team’s analysis focused on the S&P 500 and Invesco QQQ Trust, a popular ETF that tracks the technology-focused Nasdaq-100. Both the S&P 500 and the Nasdaq-100 posted strong gains on Wednesday, posting their first consecutive positive sessions since late February.
“What we are seeing right now could be a premature purchase,” said the “bad money” the host suggested. “When the shorts are over, DeMark says there is often a gap to the downside, a big move down once the shorts have covered their positions and there is no more forced buying,” he added.
According to Cramer, DeMark uses a 13-session countdown pattern that tells you when a rally or dip is likely to change direction or, in other words, hit a top or bottom. DeMark’s methodology bottoms out when the countdown reaches 13, Cramer added.
Cramer said DeMark spotted patterns in the S&P 500 and the ETF that tracks the Nasdaq-100 that suggest both are days away from bottoming.
Here’s a look at QQQ since September, including the two trend exhaustion 13s late last year.
The Nasdaq-100 is on buy countdown 10, so it needs three more successively lower lows to bottom out.
Now, Cramer noted that DeMark finds that the Nasdaq-100 is in the midst of a buy 10 countdown.
“That means we need three days of increasingly lower lows, with lower closes, before the downtrend really runs out,” Cramer said. “In other words, DeMark is expecting one last leg down before the weakness in technology plays out.”
DeMark is seeing a similar pattern in the broad S&P 500. Here’s a look at DeMark’s analysis of the benchmark US stock index since September.
The S&P 500 is also currently in Countdown 10, meaning it needs three days of successively lower lows to possibly bottom.
The S&P is also at 10 on DeMark’s buy countdown, Cramer explained. “Again, that means we need three days in a row with lower lows and also lower closes before we sell out,” she said.
Put the two pieces of analysis together, and DeMark thinks the Wall Street selloff “isn’t over yet,” Cramer said. “We can see the light at the end of the tunnel, but we are still in the tunnel.”
Cramer’s breakdown of DeMark’s analysis on Wednesday comes a day later looked at the charts from technical analyst Carolyn Boroden, who predicted that the S&P 500 will soon have a temporary bounce.
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