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Market Moves Up on Stimulus News

spx 09-28

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News of the House of Representatives and Treasury Secretary Mnuchin being close to a new stimulus package allowed the market to gap up and run through the resistance at 3353 (the 50 day moving average line) and stop just shy of 3363 resistance (the thick black horizontal line on the graph above).  You might recognize this graph from previous blog posts, so I’ve updated it for today’s action because I wanted you to see a couple of important things:

1.  First, I’ve annotated in orange the low volume on this two day recovery – for us to say definitively that last weeks low is THE low for this correction (yup, we did have a 10% correction as measured by intraday price action) we’d want to see increasing volume along with rising prices.

2.  Second, today’s action closed right at resistance and above the 50 day moving average.  Moving above the 50dma is a buy signal, and I am treating it as such, putting some money to work in new holdings.  However, the weak volume and not breaking through the next level of resistance means caution is warranted, so we still have plenty of cash available in client accounts to add new holdings if we can sustain the move above the 50dma (we need to close above it for three consecutive market days) and break above 3363 resistance.

3.  Third, I annotated in orange the new target for the market, the rising red 200 day moving average 10% envelope line (remember that rising above that line was the beginning of our cautions market outlook).  That line is at 3419 today, but it is rising and will change everyday as the 200dma changes.  It will take a lot of work for the market to get there as the downward sloping 20 day moving average lies just overhead at 3373.

4.  Finally, the downward sloping 20dma will likely present formidable resistance.  Twice before during this correction, the market has tried to break above the 20dma and was turned back down.  A typical pattern is for three failed attempts at a strong resistance level before finally breaking above it on the fourth attempt.  The odds are we could see that again as we have today’s gap higher (the yellow highlight) to fill at some point in the future.

Below is an annotated graph we’ve looked at before with the black dashed line detailing a typical path to the 200dma – I’ve updated it to show you a new potential path in pink that bounces off the 200dma resistance and then falls to fill the gap:

spx 09-28 2

If it follows this path, then it puts the original path to the 200dma back in play, likely driven by news flow much as today’s move higher was driven by news of more stimulus.  But we will have to wait to see how things play out – right now we have the buy signal detailed above but we are not at the point where there is an all clear to be 100% invested in the stock market.

—Mark