Bulls Take Round One

Last week, we discussed the continuation of the rally from the December 24th lows.

“The rally, as we laid out two weeks ago, continues to work within the expected range back to 2650-2700.” 

“Importantly, the previous deep ‘oversold’ condition which was supportive of the rally following Christmas Eve has now been fully reversed back into extreme ‘overbought’ territory. While this doesn’t mean the current rally will immediately reverse, it does suggest that upside from current levels is likely limited.” 

As I discussed previously, what was needed for the bulls to gain control of the narrative were several important issues:

  1. Central bank activity reverse from restrictive to accommodative,
  2. Washington to back off of “tariffs” and “trade war” rhetoric, and;
  3. The Federal Reserve to continue its more “dovish” stance.

Those issues were fulfilled with headlines like these from this past week:

  • Exclusive: Trump Meets with Cabinet Officials to Revive Infrastructure Push
  • Stocks Rally as Hope Mounts for U.S.-China Trade Deal
  • Is This the Real reason Why Stocks Are Surging?

(Chart courtesy of ZeroHedge)

Between a more dovish Federal Reserve, “hopeful” headlines from Washington D.C. and a “S*** Ton”of liquidity, it was not surprising to see stocks hit our first level of major overhead resistance at 2670 as shown in the first chart above.

Of course, the question now is what happens next?

Passing The First Big Test

As noted last week:

“Over the next couple of weeks, the market is going to face the ‘test’ that has defined the ‘bear markets’ of the past.”

If the market had failed at the 50% retracement line, it would have confirmed the beginning of the bear market. However, the market climbed above the lows from October and November and the 50-dma clearing the first two levels of very tough resistance. 

Importantly, while the market did break above the first level of resistance, it is currently NOT confirming the change to a bear market just yet. As shown in the chart below, the 2015-2016 correction ended when the market broke above, and successfully retested the 200-dma. That put the market back on a bullish price trend above that running moving average. 

Currently, despite the sharp rally from the December 24th lows, the market remains in a down trend and below the 200-dma. Such continues to suggest the correction remains intact and a retest of lows is likely over the next couple of months. 

This complies with my statement from last week:

“In order for the bulls to regain control of the market narrative, it will require a push back above the November highs and the 200-dma. Only then can the ‘bear market correction of 2018’ be officially declared ‘dead.’

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