Can Stocks Keep Rallying After a 35% Move From the Lows?

The stock market is pulling back on Friday. Is this the end of the run? Not so fast.
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From the March low to the April high, the S&P 500 rallied 34.8%. The Nasdaq logged a 35.1% jump, as both indices retraced a large portion of the coronavirus-induced selloff.

For many investors, something isn’t adding up though.

Before Friday’s mild pullback, the Nasdaq was flat on the year, while the Invesco QQQ Trust  (QQQ) - Get Report still is despite Friday's 3% dip. For its part, the S&P 500 ETF  (SPY) - Get Report is down 12% for the year, which makes a bit more sense.

Still, how can equities be so seemingly nonchalant about the state of the world? Global GDP is plummeting while some U.S. economic readings are coming in at their worst results ever. Thirty million people have filed for unemployment in less than two months.

This is not good, and yet the QQQ and SPY ETFs are down just 10% and 16% from all-time highs, respectively. What are we missing?

Trading the S&P 500

Daily chart of SPY stock.

Daily chart of SPY stock.

Traders can get themselves into trouble when they think too much. That sounds silly, but it’s true. When opinions turn to biases, investors can dig their heels in. One might say, “the S&P 500 is up 20% from the lows, no way it can keep going up!” 

It’s one thing to have an opinion, it’s another to let it dictate your trading. In that sense, we have one indicator and it’s the only thing that matters: Price.

Price has continued to bombard its way higher, as the S&P 500 ETF reclaimed multiple key moving averages and retracement levels. It seems almost too perfect that it tagged the 61.8% retracement and turned lower - a level that every technician and their brother was watching.

As of now, we also have the market breaking back below its 10-day moving average and out its rising wedge formation.

If the market really is out of gas, the response from this point on will be very interesting.

When it comes to opinion, I am of the belief that the stock market sold off too hard in March and has now rebounded too far in April. With price started to side with the bears, we need to see how much strength the sellers can muster and just how committed the bulls are.

On a dip, let’s see if the 50% retracement gives any sort of support. Below puts the 50-day moving average in play near $275. Below that and the 38.2% retracement is a possible support zone.

With earnings from Apple  (AAPL) - Get Report, Amazon  (AMZN) - Get Report, Microsoft  (MSFT) - Get Report, Facebook  (FB) - Get Report and Alphabet  (GOOGL) - Get Report out of the way and with these stocks struggling for upside, we see the market finally cooling off a bit.

At this point, retesting the lows would be a painful experience. However, a mild retreat would give investors an opportunity to buy the dip - something many missed out on before. From here, exercise some patience. Let the market show you which levels will act as support and which are simply pit stops to lower prices.

On an eventual rebound, bulls need to clear the 61.8% retracement, along with the 200-day moving average and ~$300 breakout level to gain any meaningful momentum.