Stocks Are Nearing a Trading Bottom

After a two-week slump for stocks a bounce could be near

After a 15-month period of essentially zero volatility in the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the last two weeks of volatility has caused widespread pain to traders and investors alike. I long warned clients as well as in this here column that while economic data points supported higher stock prices, the degree to which volatility was suppressed was unhealthy and would ultimately lead to a severe if only short-lived shock for many investors.

Stocks Are Nearing a Trading BottomIn other words, from where I sit we are now returning to a more “normal” environment where price discovery is once again a ‘thing’, which as a result leads to volatility spikes. All else being equal this is a healthy development for markets despite the pain that some overly leveraged market participants experienced over the past two weeks.

Although stocks can continue to rise for some time in this secular bull market, I very much think that the ‘easy’ money in this bull market has now been made and it gets more difficult from here. I discussed this in last week’s opening missive here.

Through the lens of risk management, over the past two weeks I have also opined to my clients that due to increased market volatility, one would be wise to adjust stop losses (widen them) and either sit it out all-together or become more active with tactical trades.

The market environment has now changed and the zero-volatility climb higher in stocks that we witnessed in 2017 will most likely be looked at as a rare example historically.

And lest we forget, cash is also an asset class if volatility gets out of hand. There is no shame in sitting in cash for a while when reward to risk in markets worsens for a while.

Lastly, just because stocks have corrected does not mean that they will immediately bounce back to their recent all-time highs. The degree of risk-off market activity over the past two weeks will likely take time to “repair.”

The Market In Stock Charts

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Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

The S&P 500 thus far has corrected close to 12% from its late-January highs and last week tested its 200-day simple moving average, which currently lines up with a simple support trend line as I drew on the chart below.

Even more interestingly, the S&P 500 futures contract last week actually tested the same lows of its 200-day moving average twice, which now a) offers very well-defined risk levels against which one can place trades and b) begs the question whether this is at least a near-term double-bottom formation.

Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

Last Friday, just as it looked like stocks were ready to tumble into the abyss, buyers stepped back in during the afternoon session, which on the daily chart below left behind a long tail or so called “hammer candle.”

In summary, after a 12% corrective period the S&P 500 SPY etf has reached a technical confluence zone that allows traders and active investors to place bullish trades against last Friday’s lows near $253. If these levels hold then a re-test higher of the 50 day simple moving average near $270 could be a next upside target.

Check out Serge’s Trade of the Day for Feb. 12.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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