This technical analyst's perspective on the stock market

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This technical analyst's perspective on the stock market

Since he discovered stock options in high school, technical analyst John Salama has been obsessed with markets.

Salama's career, which includes trading options, has turned into a career as a career. In the past 15 years, he has gone from brokering equity derivatives to trading them at Maverick Trading, a firm that issues capital to qualified traders in exchange for a portion of their investment models.

Straightforward investing strategies often work best, he said in a recent interview with Insider. He built his investing model based on a handful of technical indicators - including momentum-driven indicators like the relative strength index, money flow, and options flow, as well as seasonal signals that fluctuate based on the time of year.

Salama's wisdom is reflected in the crowd, but trend-following indicators can also provide crucial contrarian buy-or-sell signals. The strategist said he leans on RSI, which can help in time transactions. The indicator compares an investment's positive or negative momentum and determines whether it's going into overbought or oversold territory.

Salama said he uses RSI and zero-day-to-expiration options to score gains on trades.

The US stocks have been hit hard recently, and Salama said they have also weakened relative to international equities. Even though there are numerous legitimate reasons for worry about stocks and the economy right now, Salama believes that the negative sentiment has gotten out of hand, and the S&P 500 and the SPDR S&P 500 ETF trust have been beaten down too much.

Investor pessimism appears to be justified at first glance. Stocks have downward momentum, and the SPY just fell through the 434 level, which Salama said was key technical support. The SPY's value is about one-tenth that of the S&P 500, meaning that it corresponds to a break below 4,344 for the index.

The SPY is at the doorstep of oversold territory. It is currently 31, which is near the low end of the indicator's 0-100 range. A mark below 30 indicates that an asset is oversold, while a mark below 70 indicates that investors are too bullish about it, causing the stock or fund to re-leverage for a pullback.

In Salama's base case, U.S. stocks will rebound higher soon, once they find technical support. The SPY is expected to reach the 456 level by mid-October, which would correspond with the S&P 500 jumping to about 4,560, closer to its late-July high. He then predicted that the S&P 500 would notch a new record high of about 470 as investors chase a revived rally into the end of the year.

Even if stocks continue to fall, Salama said he would be surprised if the S&P 500 fell past 415 or 410, which would be a 4,100 to 4,150 range for the S&P 500. Fellow technical analyst David Keller, who also serves as technical analyst, recently gave a similar target to the upside, though he fully expects stocks to get there. If volatility suddenly spikes, Salama doesn't see the selloff going nearly that far.

After outlining his market outlook, Salama shares five stocks he's bullish on right now and gave a price target for each. Most analysts set price targets for 12 months out, but Salama said he thinks these companies can hit their targets in the coming weeks - by Halloween at the latest.

The five firms are below, along with each company's ticker and market capitalization as well as the price target and commentary from Salama, if applicable. Insider also included the consensus price targets from Wall Street analysts using Bloomberg data before calculating the expected upside over the designated timeframes.