Courtesy of Scott Martindale, Sabrient Systems and Gradient Analytics
You knew a bigger pullback would happen eventually. It was only a matter of when it would come, what would be the catalyst, and how far it would fall. In fact, investors have been hoping for a pullback to serve as an entry point to put more cash to work.
As I have been noting, the recent underperformance of quality-oriented quantitative models has shown all the signs of a “junk rally” phase that generally precedes a significant pullback. But it should remain contained. Optimism for U.S. stocks continues to improve as bears struggle to get any downside traction…and of course the liquidity spigot is still open.
Sure, the domestic economic data has been mixed and often disappointing, and yes, Spain appears to be struggling worse than hoped as the European debt contagion continues into the unknown. But it all seems to have merely provided an excuse for the overdue technical pullback. Wednesday’s bounce after Tuesday’s elevated-volume selloff is certainly promising. Alcoa’s (AA) positive earnings report helped bolster conviction.
On Tuesday, the major indexes were back below round-number resistance-turned-support levels at 13,000 on the Dow, 3000 on the Nasdaq, and 1400 on the S&P 500, but the Nasdaq recaptured 3000 on Wednesday, and the S&P 500 bounced back near prior resistance-turned-support at 1370. Looking at the SPY chart, it closed Wednesday at 137.00, which is below its near-term uptrend line (since late December) and very close to its longer-term uptrend line.
SPY is now trying to claw its way back above the 50-day simple moving average. A failure here might take it down to test its 100-day. However, RSI and Slow Stochastic have worked off overbought conditions, while MACD has made good progress in doing so. So, this is probably a spot where buyers will test bullish conviction by putting some cash back to work.
The VIX (CBOE Market Volatility Index–a.k.a. “fear gauge”) closed Wednesday at 20.02–essentially right at the important 20 threshold. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 38 bps, which is right around the 40 level that it has settled at.
I still believe that unless the bottom falls out on high volume (likely due to a major external event), taking out important support levels,…
