With a weekly gain of 5.73% at Tuesday’s close, the S&P 500 just had its best two-day rally since March of 2020.
However, I’m not convinced at this point that the selling is over. After all, we’ve seen this pattern before during this bear market.
The index has seen strong, multi-day bullish moves following each of its short-term bottoms, and each of them has ultimately led to lower lows.
With that in mind, I’m sticking to the game plan I laid out on Monday…
Just because the market is rallying doesn’t mean that I’m switching my focus back to long trades.
As I mentioned in Monday’s Watchlist Update, the market was trading at extremely oversold levels as of last week…
In the daily chart of the S&P above, you can see the relative strength index (RSI) indicator in the bottom panel of the chart.
The RSI fell to a low around the 27 level, which most traders would consider an “oversold” reading.
As regular readers know, when the RSI gets down to such low levels, it can sometimes be a contrarian indicator.
In other words, a very low reading might indicate that the sellers have overdone it to the downside, presenting an attractive opportunity for buyers.
Therefore, a short-term bounce was to be expected.
Don’t Get Ahead of the Market
Now, I say “short-term” because this market is still in a down trend… There’s no question about that.
But specifically, there are also a couple of key overhead resistance levels that I expect will give the bulls some trouble in the coming days.
In this chart of the S&P 500, I’ve added the major 50-day (red line) and 200-day (blue line) moving averages.
Both are pointing lower at this time, which is another sign that the market is in a down trend.
If the market continues to bounce from here, the 50-day (currently 5.5% above the market) will present the first big obstacle.
If it can get through that level, the 200-day (about 11% above the market) will likely present another point of strong resistance.
As I said on Monday, we must demand good entry points when the market is as volatile as it is now.
Shorting stocks when the market is already oversold carries too much risk.
But if we wait for the market to get up to resistance at its moving averages, we can use that strength to our advantage and find another round of short ideas with better risk/reward profiles.
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Embrace the surge,
Editor, Stock Surge Daily