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Stocks Flag Coming Bullish Reversals

Serge Berger

After a big week of economic data points last week, U.S. large-cap stocks, i.e the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), closed flat for the week, but importantly managed to stage a respectable rally off the intraweek lows. This risk-on move that started last Thursday and carried through Friday now looks to be setting up for further stock market upside in the near term.

Although this current stock market, at least as far as the SPY ETF is concerned, is not yet by classic definition in “bear market” territory, the choppiness and late-cycle stage of the economy may indeed ultimately lead to a deeper correction. Nonetheless, the reason why few if any investors make money in bear markets or choppy markets is because very sharp rallies can occur at any point and seriously hurt any short-side bets or hedging positions.

To wit, the rally from last Thursday’s lows to last Friday’s highs in the SPY ETF measured 3% … and that surely left a mark on any short sellers that got out over their skis.

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Click to Enlarge

Moving averages legend: red – 200-week, blue – 100-week, yellow – 50-week

Looking at the multiyear weekly chart, we see that last week’s bounce in the SPY ETF occurred right at the well-defined up-trend line from the early 2016 lows, which since early this year has also lined up with the yellow 50-week simple moving average.

While we have yet to see real follow-through buying on a weekly closing basis, last week’s bounce off the lows does look promising for a further rally toward a next upside target around the $273 area. Best of all however, the stop loss on any swing trading long positions are now ultra-well defined at the aforementioned confluence support area, currently around the $258 area.

Click to Enlarge

Moving averages legend: red – 200-week, blue – 100-week, yellow – 50-week

On the sector front, one area of the market that I have been thematically neutral from a thematic perspective (multimonth/quarter) is the financial sector as represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF). While I still think this part of the market will remain choppy for the time being, the hard bounce off last week’s intraweek lows and off its yellow 50-week simple moving average is not something I can ignore from a trading perspective.

Plenty of banking stocks and other financial stocks are now setting up for bounce trades with next upside targets of anywhere from 2% to 5% higher.

In summary, stocks remain in a choppy environment and in what I consider to be a critical phase transition period. This however increasingly brings about a  market that can be traded both ways (long and short) for the first time in a long time. Last week’s hard intra-week bounce for now is an opportunity to look for bounce trades.

Check out Serge’s Trade of the Day for May 7.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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