Trading position (short-term; our opinion): no positions are justified from the risk/reward perspective.
Having opened with a sizable gap, stocks scored sizable gains yesterday. The reversal higher makes one think that we've seen a bullish turn. And the short-term outlook has certainly turned more to the bullish side of the spectrum. Let's assess what the recent market developments mean for stocks' technical outlook.
We'll start by looking at the current week in progress (charts courtesy of http://stockcharts.com).
Yesterday's close means that the bulls have moved all the way to the upper border of last week's sizable bearish gap. As the S&P 500 futures have cleared the 3300 level in today's premarket trading, the gap ceased to support the sellers.
The weekly indicators are turning higher. That increases the likelihood that the RSI and CCI sell signals will be invalidated before long - and the same goes for Stochastics' sell signal flashed in the overbought area. To be clear, the week is not yet over, and thus the positions of indicators are not that important just yet. We will really know where the weekly indicators moved only after Friday's closing bell, but what we see so far provides us with some indication, nonetheless.
The week isn't over yet, but as the reversal unfolds, let's examine the daily chart. It'll show the effect of monetary stimulus in the face of the evolving coronavirus story. Will China's actions overweigh the economic consequences, helping to drive stock markets across the world higher?
The bulls opened on a strong note yesterday, adding to sizable premarket gains later in the day. While they were rejected at the previously-broken rising blue trend line yesterday, today's premarket trading is marked by another bullish gap. As S&P 500 futures trade at above 3325 currently, the previous breakdown would be invalidated. We'll have to wait for the markets to close to really say that it was indeed the case.
How does the recent action show up in the daily indicators? They have stabilized, and turned higher, with Stochastics even flashing its buy signal. That's certainly a bullish factor. Yesterday's volume was in line with the day before, which means there's little danger of an impending, powerful reversal lower.
But is the coronavirus panic over, or just temporarily quelled by stimulus money? When there's another flare-up in fear (and it's likely we'll get one unless the virus mutates one of these days to become less grave), just how much lower can it take the stock market along?
Looking at the daily chart, does the inflicted economic growth hit and supply chains disruption look to have been absorbed to you? And what about the outlook for corporate profits?
That is why we think the current price level doesn't offer a suitable entry point from the risk-reward point of view. Chasing the upswing would result in an unfavorable risk-reward ratio, especially as the market remains vulnerable to a downside move - or consolidation of recent gains as a minimum.
As a reminder, we are in a stock bull market. The strong comeback highlights that we haven't seen reliable signs of a market top - thus, corrections are to be bought. And there is still a good likelihood of us getting one shortly, regardless of the improvement in the indicators. Therefore, staying on the sidelines remains the right course of action right now.
Summing up, the S&P 500 outlook brightened with yesterday's upswing as the damage done on both the weekly and daily charts is being repaired. We aren't out of the woods yet, though. This week's upswing remains vulnerable to a downside surprise, or gains consolidation as a minimum. We're eyeing a favorable setup to get back in on the long side as the stock bull market is 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
