The S&P 500 Index bounced up 20% from its Monday low to its Thursday closing high. It seemed primed for the bounce and in Tuesday’s article where we pointed out a bullish morningstar reversal pattern. But we also mentioned that a V-shaped recovery was not what many technicians wanted to see. Volatility is extreme and a volatile rebound is not likely to be sustainable over the intermediate term. What would be optimal is for base building that would act like a platform for an extended stair-step advance. Measured moves of higher highs and higher lows over time give investors confidence that the move is sustainable. We may be in the early stages of building a base but unfortunately it requires a pullback.
The bounce in the S&P has taken the index up to the 38% Fibonacci retracement level of its February/March range. This level is intersecting with a downtrend line. It seems like a logical resistance level and a point for a pause in the rally. What we want to see now is some sideways action. This lateral movement could retest the lower level but should not make a new low. In a perfect technical world an extended W-pattern would form inside this week’s high/low range. This is just one possibility, of course, and there are numerous ways bases are made. Simple steady action over time instills confidence and confidence in the stability of the market produces higher prices.
It should be noted that this week’s upside action has turned the technical indicators up and out of their negative zones. Alternatively, the 50 day moving average is preparing to cross under the 200 day moving average, the classic “death cross.” The problem is that both the technical indicators and the moving averages are lagging indicators. Market or price action is the primary thing to watch.
The market needs a foundation to build on and construct a new all time high.