The Fiscal Pop-and-Drop for Equities. Look Out!

By Chris Vermeulen  JAN 02, 2013 1:25 PM

Today's gap higher in stocks has many investors feeling really good, but will this rally last?


Today's gap higher in stocks has many investors feeling really good, but will this rally last?

My to-the-point answer is yes, but there will be some bumps and the need to navigate positions along the way.

Looking at the charts below you will notice how stocks are trading up over 4% in two trading sessions, and several indicators and technical resistance levels are now being tested. Naturally when there are several resistance levels across multiple time frames, cycles, and indicators we must be open to the idea that stocks could pause or pull back for a few days before continuing higher.

Here is a quick snapshot of charts I follow closely to help determine short-term overbought and oversold market conditions.

Momentum Extremes

This chart helps me know when stocks are overbought or oversold. This trend can be followed using the 30- or 60-minute charts, helping you spot short-term tops and bottoms.

Stocks Trading Above 20-Day Moving Average

This chart helps me time swing trades which last for one to three weeks in length. I use the daily chart to spot these reversals and trends.

Daily S&P 500 Index (INDEXSP:.INX) Chart

This chart shows the big gap in price, test of upper Bollinger band, momentum and swing trading cycles topping and 12 buyers to every one seller on the NYSE. This tells me everyone is running to buy everything they can today, and that is a contrarian signal.

Trading Conclusion

This strong bounce, which started on Monday from a very oversold market condition, does look as though it has some power behind it. And over the next one to three days we could see prices grind higher until this momentum stalls out. Once that happens we should see most of the gap filled. This will provide us with a lower entry price and reduce our downside risk for index, sector, and commodity ETFs.

This type of bounce and momentum can lead to a running correction, which makes it impossible for traders to by on a dip. A running correction is when prices slowly chop higher in a narrow range for some time then explode higher, continuing the rally. This is when you just need to jump in trades and chase prices higher, but I will not do that until I see signs of a running correction.

Today many of the major market-moving stocks are testing resistance, which means if they start to get sold, the broad market will pull back with them.
Editor's Note: Chris Vermeulen offers more content at his sites, and Traders Video Playbook.
No positions in stocks mentioned.

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