The easy money has already been made for the current bounce in the stock market.
Any further gains from here are going to be a hard fight…
The Volatility Index (VIX) generated its first buy signal of the year last Thursday… and stocks have rocketed straight up since then.
The S&P 500 traded yesterday about 300 points higher than where it opened on Friday. That’s a 300-point gain (roughly 7%) in just four trading days.
Heck, given the action so far this year, many traders would probably be happy to lock in that profit, close their books, and take the rest of the year off…
While there’s still a bit more upside remaining for this bounce, it looks like we’re now setting up for a few weeks of choppy, back-and-forth action.
Just take a look at the updated S&P 500 chart…
This chart shows a straight-up ‘V’ shaped move off of Friday’s low.
The index has overcome the resistance of both the nine- and 20-day exponential moving averages (EMA – red and green lines). It’s now approaching its blue 50-day moving average (MA) line near 4626. The index will likely struggle as it approaches that level.
Despite the strong bounce, none of the technical indicators at the bottom of the chart (MACD, RSI, and CCI) are anywhere near “overbought” territory.
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The RSI and CCI momentum indicators are neutral. And the MACD is still deep in oversold territory.
So, it seems unlikely the market will turn around and immediately retest the lows.
Rather, we’re probably headed into a consolidation period – where the S&P 500 ping-pongs back and forth between its various moving averages.
Traders should note that all of the various moving averages are spread quite far apart from each other (blue circle).
We usually don’t see big moves in the market when the MAs are in this condition. Instead, the market chops around in a tighter trading range and gives the MAs time to come back together and build energy to fuel the next big move.
We had a chance to buy into oversold conditions last week, when technical conditions were stretched to the downside and investor sentiment (a contrary indicator) was leaning quite bearish.
Traders who had the courage to do that are sitting on nice profits today.
But buying stocks today – after the market has already bounced well off the lows – is a bit more challenging.
The market needs time to consolidate the recent bounce before it makes another big move.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Did you buy into oversold conditions last week? If not, how long do you think it’ll take for another big move?
Let us know your thoughts – and any questions you have – at [email protected].