The bulls did exactly what they needed to do on Friday.
The S&P 500 was on the verge of breaking down from a consolidating triangle pattern. A decisive close below 2630 would have targeted a decline to as low as 2535 on the index.
But the bulls stepped up. Despite opening lower, the market reversed and turned higher on the day.
Then the buying pressure really kicked into gear. By the end of the session, the S&P was trading at 2663 – up 1.3% on the day.
The index is now trading above its 9-day exponential moving average. And it’s challenging the resistance line of the triangle pattern. Take a look…
This chart looks as bullish today as it looked bearish on Friday – which is to say we still don’t have a definitive direction. The S&P 500 has closed each of the past three weeks near the 2670 level. The index is consolidating and building up energy for the next trending move.
It is still going to take a decisive close below 2630 or above 2675 to kick off the next trend. Only now, it appears the bulls have wrestled the momentum from the bears.
I’d love to say with confidence that last Thursday’s close at 2630 marks point E on the chart and completes the fifth and final wave of this correction phase. That would all but eliminate the potential for a large “flush” to the downside. Traders could then buy with confidence that the correction is over.
But we can’t say that yet. The S&P needs to rally above point D (2717), and then come back down and form another higher low on the chart, before we can say a new rally phase has begun. So, traders still need to be aware of the potential for even lower stock prices in the days ahead.
We are, however, closer to the end of the correction than to the beginning. The stock market is likely to be higher a few weeks from now than where it is today. So, as I’ve been saying for a few weeks now, the best strategy for traders is to take advantage of market weakness to slowly add to their long-side exposure.
I’d still prefer to see the market flush to the downside one more time just to shake out the weak hands and create an extremely oversold buying opportunity. But there’s no guarantee we’ll get that.
By buying small positions on weakness, traders can at least be sure to have some exposure if the market starts to ramp higher from here, while still having funds available to buy if we get that final flush.
Best regards and good trading,
Jeff Clark
P.S. No matter which way the market turns, you ought to be prepared for the volatility that lies ahead.
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