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

Stocks have strongly rebounded yesterday, invalidating the preceding bearish formation in the process. And they continue to point in the direction of more gains right from the opening bell. Can the bulls keep the rally going?

The daily chart will show us the significance of yesterday's price action (chart courtesy of http://stockcharts.com).

Bearish gap closed, and the abandoned baby formation invalidated with yesterday's daily action. What's more, the weekly outlook discussed yesterday also supports the bulls. What about the daily indicators? Check, as they're still supporting the bulls.

But does it mean that the advance from late-January lows has been as strong as it seems?

To find out, we'll assess the upswing's health by examining the current status of the breath indicators.

Breadth indicators send an important message, as they either confirm or flash a divergence with prices. Currently, neither the advance-decline line, nor the advance-decline volume confirm this reversal. New highs minus new lows also has a serious catching up to do.

That's the very short-term view. Over time, these breadth indicators either move to new highs, thus confirming the price advance, or the S&P 500 moves lower because the bulls aren't as strong as it seems by looking at prices only. Which way are things more likely to play out this time?

The current setup makes another downswing in one of the nearest sessions likely. Such a resolution to today's divergence appears more probable than a correction-free grind to new 2020 highs on a daily basis. Moreover, it would create a launching pad for a healthy upswing continuation. And that's supported by the bullish percent index being over 50%, which supports the bullish bias.

It's just that the rally internals don't support a hiccup-free upswing continuation just yet. That's why we're remaining cautious, and looking for a more attractive entry point from the risk-reward perspective than we're facing at today's premarket highs over 3360. The most likely short-term scenario is a continuing consolidation of recent gains as a minimum. The bears' return still remains likely in the very near term.

Summing up, the S&P 500 outlook brightened again yesterday, and the weekly and daily indicators have turned bullish. But it would be premature to declare this correction (in time and in price) as over. The examination of the rally's breadth confirms that the bulls are not as strong as they appear. As a minimum, we can expect consolidation of recent gains. A favorable setup to get back in on the long side would naturally follow, as the rebound's veracity shows that stock bull market is climbing a wall of worry. In other words, it's alive and well.

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