Last week I wrote, “The market looks like it just put in a near term low on Friday as the bulls showed up and defended the longer-term 200 DMA line.” That is exactly what happened as stocks soared last week and enjoyed their best week since 2013. I also said, “History shows us that 80% of corrections do not turn into bear markets and 20% do.” and the snap back action suggests this bull market has more room to run. Earnings are expected to grow massively and that is the big bullish catalyst that may keep this bull market alive longer-than-expected.
For now, as long as February’s low holds, the bulls remain in control of this market. If support is broken, then this correction will likely get much worse. Conversely, the next level of resistance to watch are the recent highs from late January. If the market takes out those highs, that will be an incredible feat and suggest we are headed higher. Until then, I have to expect more sideways/sloppy action to continue. The market rallied hard last week and could easily pullback to digest that big run.
A CLOSER LOOK AT WHAT HAPPENED LAST WEEK…
Stocks soared on Monday as investors scooped up shares at beaten down levels. It is important to note that the previous Friday, institutions showed up and defended the longer-term 200 DMA line which set the stage for this week’s rally.
There are two important factors that occur when the market snaps back from deeply oversold levels. First, there is a tremendous amount of short covering (people buy back stock to exit their short positions) and second, the buy the dip crowd shows up and buy stocks at lower prices. Stocks opened lower and closed near their highs as buyers showed up and bought the latest dip.
Once again, the market opened lower on Wednesday after inflation ticked higher but the bulls showed up and aggressively quelled the bearish pressure helping it close nicely higher by the close. The big money largely flowed into tech stocks and financials as the market jumped nicely and broke out of a small head and shoulders continuation pattern.
Thur & Fri Action:
The market rallied nicely on Thursday as investors continued buying stocks. Shares of Cisco ($CSCO) rallied nicely after the networking giant reported earnings. Separately, Amazon ($AMZN) said it will team up with Bank of America ($BAC) to offer loans to merchants. Stocks were relatively quiet on Friday as the market enjoyed its best weekly gain since 2013.
Market Outlook: Market Bouncing
The market is bouncing back after a steep 10% pullback. The big level of support to watch is February’s low and then the 200 DMA line for the major indices. For now, as long as that level holds, the longer-term uptrend remains intact. As always, keep your losses small and never argue with the tape.