RUBBER BAND REBOUND
Similar to what happens when you release a severely stretched rubber band, and following deeply oversold readings from just over a week ago, domestic equity markets have recorded a sharp “snap back” rebound. In doing so, the S&P 500 stopped right at resistance last Friday, defined by a declining 20-day moving average and a “retracement” level—2744 was a retracement level of the recent waterfall decline.
While I don’t believe the ingredients were in place at the late January high to signal an end to the secular Bull market, I do believe that the odds favor a further period of digestion for the equity markets—the development of a broad consolidation range as opposed to an immediate return to new highs. Consistent with a trading range environment, I continue to believe the odds favor additional equity market volatility in both directions.
While I believe the odds favor that the recent low was sustainable, I still think that the potential exists for a retest of the February lows. However, I have no way of knowing if a retest of the recent low will be a “full” retest [2581 to 2532 basis the S&P 500 (SPX/2716.26)], a “partial” retest (please refer to chart) or an “undercut” retest.
Finally, I need to be cognizant of an alternative scenario to my current line of thinking. An acceptable scenario to my “retest sequence” would be that the broad consolidation period lasts for a period of months, not weeks. It doesn’t include another “waterfall” decline and is contained within the levels shown in the second chart.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies.
Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management
—Written on 02.20.2018. Chart sources: Stockcharts.com.
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