The Setup Is Perfect For A Violent Bounce

The stock market is setting up for a violent bounce.

The most likely catalyst for this would be a ceasefire or some kind of negotiation breakthrough between the U.S./ Israel and Iran, but the charts are clear: barring a catastrophic exogenous event, stocks are primed for a sharp, short-term rally.

First and foremost, market internals are at levels associated with lows.

Only ~20% of S&P 500 (SPX) stocks are currently trading above their 20-day simple moving average. Historically, this has been associated with tradeable lows as the below chart illustrates.

This suggests a bounce is at hand. Less than one in five stocks in the entire index is in an uptrend. Nothing goes straight up or straight down in investing. And this metric has proven to be a good signal for determining when a tradeable low is at hand.

We get confirmation of this from high yield credit (junk bonds).

As I’ve outlined many times in the past, this segment of the debt market is extremely sensitive to changes in the financial system/ real economy because these bonds have a high likelihood of default even under the best circumstances.  As I write this, the High Yield Credit ETF (HYG) is sitting at critical support at the 200-DMA. It is unlikely that HYG breaks below this line on the first attempt, which implies that the financial system is on the verge of finding some “relief.”

This will likely prove to be a VIOLENT move too.

Remember, the most violent rallies occur in the context of stock market drawdowns/ bear markets. During the tariff meltdown, stocks rose 10% in a single day when the President placed a 90-day pause on the trade war. Could a similar thing happen if there’s a breakthrough in terms of negotiations between the U.S. and Iran? Absolutely.