Stocks entered this week in an extremely oversold condition, with overwhelmingly bearish sentiment amongst investors. Just 4% of stocks in the S&P 500 sat above their 50-day moving average heading into the 4th of July holiday – a number even more dismal than the March 2009 lows!
Today we got a sharp rally in the S&P. It was perhaps largely carried by short covering – but nonetheless it drove the index up during the entire session, to close above the 1060 mark.
Yesterday I covered my S&P 500 short position. but I admitted I was concerned I might miss out on a further decline. In hindsight, that cover worked out well.
The 1040 mark did not provide much resistance this time around, as the S&P plowed upwards through this mark. If this rally continues, a filling of the gap up to 1080 may be the next logical stopping point. If things really get moving, it’s possible we could see a retest of the 200-day moving average, which sits at the 1111 mark right now.
But putting this all in perspective – unless we take out the late June highs, these rallies are nothing more than favorable setups for short entry points. The S&P 500 chart illustrates it all – since April, it’s been nothing but lower highs and lower lows:
Despite today’s rally, the S&P is still making lower highs and lower lows – AND, it still sits below its 200-day moving average. (Source: StockCharts.com)
The further we rally to the upside, the more I like our chances on new short positions. I’m on the sidelines for now, but I’d love a short entry at 1080 or above, if we make it that high.
The risk would be contained, as the June highs would mark the point at which we’d want to get out. But the potential reward could be quite attractive if and when the S&P starts to nosedive again, with the next plunge to likely take us well below the 1000 mark.