The stock market punished the bears on Friday.

The S&P 500 gained 43 points for the session. That’s a 1.6% gain – in just one day. It was a large enough move to erase three days of declines and turn the index higher for the week. And it was enough to dump a large bucket of ice water on the bearish case.

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Ever since the index started to rally off of its closing low of 2581, I’ve been arguing that a “V” shaped recovery – a rally right back up to the old highs – seemed unlikely. It seemed more probable that stocks would bounce back and recover as much as 50% of their declines, then the market would come back down and retest the lows before we’d get a more sustainable rally.

That makes 2730 an important level for the S&P 500. That’s the mid-point between the stock market’s all-time high and the closing low of the recent correction.

The index closed above that level on Friday… not so much above it that it completely negates the possibility of a retest of the lows. But it was a strong enough move to force bearish traders to consider at what point they’ll cry “uncle” on their short trades.

As I mentioned on Friday, for me that point is a close above 2754. Let me explain how I got to that number.

Take a look at this 15-minute chart of the S&P 500…

Over the past five trading days, the S&P has waffled in a wide trading range between support at 2700 and resistance at 2754. A break of either of those levels should create a move of up to 50 points in the direction of the break.

In other words, if the S&P closes above 2754, then look for a move up to 2800. If the index breaks below 2700, then it should quickly move down towards 2650.

I still favor the downside here and the potential for a retest of the lows of the correction. But, if the S&P 500 closes above the 2754 level, then it will be hard to argue a bearish stance. The bulls will have regained the momentum.

Best regards and good trading,

Jeff Clark

P.S. Over 30 years ago, I made a discovery that cemented my success as an option trader.

And ever since then, I’ve been using it to book countless triple-digit gains for my readers – not the big-money firms knocking down my door and asking me to reveal it.

To learn more about it – and why tomorrow, February 27th, may be one of the most important dates in the market this year – check out this presentation my team and I just put together.

Reader Mailbag

Today, some reader responses to last Friday’s essay, “How to Profit When the Market Goes Nuts”…

Great thoughts…helped me understand your analysis so much better. Thanks.

– William

 

Jeff, I am a former options and commodities floor trader and love trading. I find your insights very helpful to my “gut” instincts. I trade around your suggestions quite often and appreciate your longer-term view. e.g. I am now trading from the short side and have bought/traded the SPY puts 3 times and just pick a number to sell them if the market tanks.

As you know, unless you are watching the market constantly, which I don’t, options (other than deep in the money) don’t necessarily track the underlying security exactly, so picking a sell price is a guess. I suspect this strategy will not work one of these times and it probably means that if the market does test 2581, I will be out of my position. Keep up the good work.

– Karen

 

Jeff, your dad was a wise man. Thank you for sharing his wisdom. I’m pretty sure I’m going to remember his quote for the rest of my life. Keep up the great work.

– Jesse

As always, feel free to write in with any questions, comments, suggestions, or trading stories right here.