The bounce off the lows last Thursday and Friday has sparked a debate of bulls versus bears. Since each animal represents either the buyers or the sellers relative to momentum, it is important to know which is in control relative to the short term trend. It is all too easy to believe after two days of solid buying and a third that held its own, the buyers are in control. The reality is that a reversal tends to favor the prior momentum until the turn is complete. The sellers have relinquished the aggressive selling, but the turn is not complete until we move through key levels to show momentum. The S&P 500 index as an example is near the 1800 mark, and to clear this, the 1810 level and the 50 day moving average, would put the bottom reversal in an upside mode negating the break lower from a week ago. The challenge is letting the move develop without attempting to predict the outcome.
Prognostication is a honest and simple challenge we all face relative to the outlook of direction for the markets both short and long term. When the market becomes mover volatile and swing within a specific price range it is tough to wait and let the trend develop. Too often if we remain in a choppy or sideways trending market, we hit stops and chop around in our trading. There is nothing wrong with that as no one knows for certain when the upside catalyst will be for stocks or what the driver will be. Thus, the short term chop will eventually turn into a nice uptrend when the conditions are right for the move. As much as we would all like to believe we can put the trading odds in our favor, we are all still dependent on the trend and its future development for confirmation on any strategy.
Monday’s trading was not convincing for the previous upside bias, but the early selling lost any conviction as the buyers started to gain traction as the day progressed. The move didn’t gain any trend changing advances, but they did hold the recent gains from last week. That leaves us in position to continue the bounce back towards the previous highs and cancel the selling from the last two weeks. However, the negative talk remains with equally convincing arguments. We are willing to watch and see how tomorrow unfolds and if it will offer any further clues as we move forward.
Watch for the S&P 500 index to clear the 1800 level on above average volume. The NASDAQ cleared 4130 and added to the upside on Monday offering the current leadership. The Russell 2000 Small Cap index needs to clear the 1200 mark and return to the leadership of the major indexes. Bonds are flat after yields have fallen and prices rose. Watching for the downside in the bond prices if equities start to rally again. Bottom line we are looking for “normal” to return to the markets with plenty of conviction to recreate the uptrend moving forward.
That would simply mean that the buyers would regain momentum or the bulls are driving the short term trend. Patience is the key to seeing how this unfolds. One day at a time is the key.