The easy gains in this stock market rally are behind us. The bears are in the driver’s seat … but the bulls aren’t going to go down without a fight.
Stocks have rallied hard off of their February bottom and are running into overhead resistance. The volume-at-price charts I’ve been publishing this year show the picture pretty clearly.
The S&P 500 made a closing low of 1,829.08 on February 11 and a closing high of 2,051.60 on March 21.
What’s holding back the Re-Entry Rule trigger is the Smart Moving Average. It is starting to turn up ever so slightly but it will likely take another two weeks of the S&P 500 holding its recent gains for the Smart Moving Average to confirm a Re-Entry Rule.
The Smart Moving Average is doing exactly what it is supposed to do. It’s conservative by design. It prevents us from getting whipsawed by the violent head-fake bounces that often occur after sharp corrections.
[TradeStops Tip: You can add a Re-Entry Rule alert to your TradeStops account by adding a position on the symbol SPX to a manual watch-only portfolio and then putting a Re-Entry Rule alert on that position. You can watch a recently recorded webinar on using TradeStops to research stocks by clicking here.]
Will the recent rally eventually be proven to be a head-fake bounce or is it the beginning of a new leg in the on-going bull market?
I know that everyone likes unambiguous answers. I wish I had one for you, but it’s really difficult to say which way the stock market heads from here. It’s even more difficult to say when it will happen.
For me right now, the bears are in the driver’s seat until proven otherwise. The strong overhead resistance we see in the top chart above coupled with the negative weight of the Smart Moving Average are the main things that give me pause.
My favorite medium term time-cycle for the S&P 500 is also looking a little toppy. It suggests that, while we could see a bit more of a rally, at least a short-term correction is on the horizon.
So yes, the bears are in the driver’s seat but just remember … that doesn’t mean that the bottom is going to fall out of the stock market on Monday. While the bears may be in the driver’s seat, they’re feeling the pain of the recent 12% rocket rally. The market Sirens may well toy with their hopes and dreams a wee bit longer.
As for me, I’m starting to look for some puts to buy to hedge my portfolio.
Hoping the storm will pass … but taking precautions nonetheless,
Richard M. Smith, PhD