Does Today's Bounce Mean It's Back to Normal for 2013 Market Rally?

John Darsie
February 22, 2013

The market recouped a good portion of its losses from Wednesday and Thursday, and the S&P reclaimed its 8-day moving average during today's session, putting a bullish spin back on stocks. The S&P closed below its 8- and 21-day moving averages for the first time in 2013 this week, but the fact that we quickly recovered above them is a sign that bullish sentiment remains intact. Dip buyers appeared eager to take advantage of what amounted, frankly, to a very modest pull-back. The S&P finished the day up 0.88% while the Nasdaq bounced 0.97%.

Scott Redler talks in his Swing Trading Course about how to use short-term moving averages as a resource, rather than hard and fast rules. According to his methodology, a close below the 8- and 21-day MA is a cue to take more caution, but it's the response to that bearish close that we are really interested in. If a stock or index closes below those key moving averages and holds below them for several sessions, it increases our conviction that the stock could be headed even lower. On the flipside, if a stock or index is able to reclaim key levels one or two sessions after breaking them, the significance of the break below is largely negated. In this case, it is prudent to take a bit more caution, but the market could resume its path back to highs based on today's resilient price action.

On dips, we like to take a very selective approach and focus on only the strongest stocks. From a sector standpoint, the banks have been the strongest and were a focus today for many traders. Goldman Sachs (GS) has been leading the sector since earnings, so it made sense to limit your focus there, or also perhaps with fellow leader JP Morgan (JPM). Both stocks held their 21-day moving averages during the two-day pullback, and were able to rally back up near their 8-day MA's today. GS closed the day up 2.1% while JPM bounced 1.4%.

I also talked about Google (GOOG) as a focus this morning on the bounce. The stock faded a little bit after a sizable gap up, but essentially closed where it opened, which is healthy action. On a Friday in what has been a somewhat quiet market volume-wise this year, it's hard to expect too much. GOOG closed the day up 0.5%, and I believe it could test all-time highs again soon amid considerable buzz about its Google Glasses project.

LinkedIn (LNKD) is another strong earnings stock that I talked about this morning for a potential re-buy, and it held its gap up well during the session. Although LNKD is high into orbit right now, that doesn't mean it can't continue to lead higher when the market firms back up. LNKD finished the day 2.0%.

The 3-D printing stocks also bounced today after a day of heavy selling yesterday. The sector continues to be a focus for momentum traders, as there is considerable volatility in these names. Keep in mind that 3-D Systems (DDD) reports earnings before the open on Monday, so there could be a large gap and significant volatility in that stock and sector. Stratasys (SSYS) has been the weakest one in the group, and has bled lower almost into its 200-day moving average.

*DISCLOSURES: No relevant positions