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


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

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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