Trading position (short-term; our opinion): no positions are justified from the risk/reward perspective.

Stocks have opened on a bullish note yesterday, and the bulls have been adding to their gains. Before the closing bell though, much of those gains were lost. Where does it leave the bullish case, and do we already have a reliable one?

It won't certainly hurt to take a look at the bigger picture. We encourage you to read our yesterday's comprehensive analysis if you haven't had the chance to do so already. Let's get right into the charts to examine how this week's price moves are shaping up (charts courtesy of http://stockcharts.com),

Since breaking above the upper border of the rising purple trend channel in November, stocks moved lower in January. Last week's sizable bearish gap remains open, capping potential gains.

Price action has moved close to the rising trend channel's upper border, yet the bulls opened yesterday with a bullish gap. This means that the trend channel's upper border hasn't been tested yet.

Let's recall our yesterday's observations:

(...) The weekly indicators' posture has deteriorated, with both RSI and CCI leaving their overbought territories. While Stochastics has as well issued its sell signal, it's still in the overbought area where signals can lead to frequent whipsaws.

Yesterday's action means that both RSI and CCI are now curling higher, though they haven't invalidated their preceding moves just yet. As a result, caution is warranted.

After yesterday's rout in the Shanghai Composite, the index rose 1.4% in today's trading, supported by the &71bn liquidity injection into China's banking system. As it comes on top of yesterday's stimulus, it has worked to curb the bears' appetite for selling earlier today - also in the US as the S&P 500 futures change hands at around 3280 currently.

Let's assess the short-term situation on the daily chart.

Since stocks opened on Monday, January 27 below the rising blue trend line, the bulls twice verified the breakdown. Unless they close above 3300 in one of the coming sessions, all upswings are nothing more than verifications of the preceding breakdown.

While prices have moved away from the red support zone coupled with the 50-day moving average, we better turn our attention elsewhere. Volume of yesterday's upswing was clearly lower than that of Friday's selloff, which subtly speaks in the bears' favor. While both RSI and CCI moved higher yesterday, Stochastics remains on a sell signal. All the above makes it a risky proposition to call this correction as being over.

There is one more factor speaking against the end of panic selling. Let's quote from our yesterday's flagship Gold & Silver Trading Alert

(...) We've already experienced something similar. Remember the time when everyone was gravely scared of ebola? ... History rhymes, so the markets are likely to react to similar scares just as they have been reacting to the previous ones. ... The situations are not identical, but the emotions that they generate are. ... How can we measure if people got similarly scared? ... Google Trends allows to check the popularity of a given search phrase over time. Let's see if people were similarly scared in 2014 as they are right now (charts courtesy of Google Trends).

Absolutely.

After periods of relatively little interest, it suddenly spiked as people got concerned and scared. In fact, at the 2014 peak, people were searching for ebola more than they are searching for coronavirus right now. It seems that people were more scared of ebola in 2014 than they are scared of the coronavirus right now.

Or - which is more likely true - the fear has not yet peaked this time.

Why would this be more likely? Because we should also take into account the increased usage of Internet worldwide as well as increased use of social media in general. ... That's quite likely why the spike interest in ebola of 2014 is so much bigger than the spike in interest in h1n1 that we saw in 2008. Consequently, we can expect the coronavirus interest to peak at levels greater than those at which the ebola interest peaked in 2014.

The stock market was very sensitive to the changes in ebola interest. Stock declined visibly, reacting clearly and strongly. ... During the peak interest, stocks declined about 10% from their previous 2014 high. So far, stocks have declined only about 3.3% from their recent high.

That is why the current price level doesn't offer a suitable entry point from the risk-reward point of view. Instead of chasing the upswing of the day, we would be better off leaving the market to digest the Chinese backstop euphoria and absorb the increasing coronavirus fears on the ground as the issue appears far from solved. Technically, this shows in the modest volume of yesterday's move and the above-mentioned position of the daily indicators.

As a reminder, we are in a stock bull market and haven't yet seen reliable signs of a market top - thus, corrections are to be bought. Taking into account the existing deterioration on both the weekly and daily charts, staying on the sidelines remains the right course of action until an opportune entry point on the long side emerges. From the risk-reward perspective, this hasn't happened yet.

Summing up, while the S&P 500 rose yesterday, the bulls still have a way to go in repairing the damage done on both the weekly and daily charts. Positive sentiment carried over from China's market interventions is helping to lift stocks in today's premarket trading, yet not chasing stocks higher is prudent from the risk-reward point of view. That's also the case fundamentally, as the coronavirus panic doesn't appear to have peaked yet. Let's look for more reliable signs of bulls' strength to emerge first. This means that we're eyeing a favorable setup to get back in on the long side as the stock bull market is alive and well, and there's no evidence of a top being in.

Trading position (short-term; our opinion): no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits - Effective Investments through Diligence and Care