It's shaping up to be an historic year in stock markets around the world.
With the devaluation of the Chinese currency, the yuan, investors around the world are left wondering what country is next. There will be other countries that will devalue their currencies and break the peg to the U.S. dollar and the market turmoil will only get worse.
In the U.S., the DJIA has lost an incredible 6.21% in the first five trading days of 2016. The S&P 500 has lost 5.71% in 2016. The Nasdaq is down 6.93% in the first week of trading and the Russell 2000 has lost 7.88% in 2016.
The S&P 500 Trust Series ETF(SPY) - Get Report volume has traded over 100 million shares every day this week and traded over 200 million shares three days this week. There has been massive distribution this first trading week of 2016.
There is no positive way for the bulls to spin the action. This stock market is bearish. The negative divergences with stock prices have a way of playing out to the downside. It appears that when the Federal Reserve raised interest rates in mid-December, that was the catalyst for this huge downside move in the stock market.
The question now is what happens on Monday when the stock market opens? Traders should not be surprised at anything at this point.
The Fed may not understand how our complex, dynamic, interconnected global financial system works. That is a scary thought. The Fed continues to use the wrong models and base its work on the outdated Phillips Curve and other obsolete tools.
With all the doom and gloom out there in the marketplace, it would appear that the U.S. stock market is sufficiently oversold that we should see a relief rally early next week within an extreme bearish trend.
Two stocks that I started long positions in on Friday are Palo Alto Networks(PANW) - Get Report and Nuance Communications(NUAN) - Get Report . Both stocks are extraordinarily oversold on a daily basis and should provide some nice upside for a trade higher next week. Attached is the chart for Palo Alto Networks that clearly shows the extraordinarily oversold condition.
This article is commentary by an independent contributor. At the time of publication, the author held PANW and NUAN.