Are Stocks Merely Bouncing to Lower Highs?

An image of a stock chart with money, a calculator and a pen lying on it.
Credit: Shutterstock photo

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Last week's more than 4% rally in the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA: SPY ) quickly brought back the animal spirits of traders as bullish commentary as measured by my proprietary reading increased all week. From where I sit however it looks increasingly likely that stocks may only bounce to lower highs for the time being.

stock market today

In last week's opening missive from Feb. 12 I offered that a near-term trading bounce may be ready; "…after a 12% corrective period the S&P 500 SPY ETF has reached a technical confluence zone that allows traders and active investors to place bullish trades against last Friday's lows near $253. If these levels hold, then a re-test higher of the 50-day simple moving average near $270 could be a next upside target."

With yields on the 10-year U.S. Treasury Note climbing toward 3% and overbought readings on the weekly chart for stocks still present, I am in the camp that for the coming weeks/months the S&P 500 won't be revisiting its January highs and that another downside press may be in the cards.

Today's Stock Charts

Click to Enlarge

Moving averages legend: blue - 8 day, yellow - 21 day

On the daily chart, note that the SPY ETF by end of last week rallied and thus far stalled at a technical confluence area made up of three things - 1. the black former support line (now resistance?), 2. the yellow 21-day simple moving average and 3. a 61.80% Fibonacci retracement of the entire sell-off from the late January highs down to the Feb. 9 lows.

While anything is possible, I now favor stocks to pause around current levels for a while with the possibility of another leg lower.

From an asset allocation perspective to me that calls for reducing my long exposure in the portfolio for near to intermediate term durations.

Click to Enlarge

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

With stocks potentially capped for the nearer-term time frames, I want to look for buying opportunities in utility stocks.

The multiyear weekly chart of the utility sector as represented by the Utilities SPDR (ETF) (NYSEARCA: XLU ) shows that two weeks ago the lower end of the longer-standing up-trend was finally reached. Last week the XLU ETF bounced, which now gives active investors and traders a well-defined support area around $48 to trade against on the long side.

One way to take advantage of this current oversold signal in the XLU ETF is by applying an options income strategy. To find out more about this high-probability income strategy, join me for a special free webinar on Tuesday for InvestorPlace readers. Register here .

In summary, the higher-volatility environment we entered in late January is likely to stay for a while and while I do think stocks could ultimately see fresh highs again, I am a better seller of last week's bounce than apt to chase stocks higher after a six day rally.

Check out Serge's Trade of the Day for Feb. 20.

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 .

Tell us what you think about this article! Drop us an email,chat with us on Twitter at@InvestorPlaceorcomment on the post on Facebook. Read more about ourcomments policy here.

Take Serge's quiz to find out which trading strategy best suits your personality.

More From InvestorPlace

Compare Brokers

The post Are Stocks Merely Bouncing to Lower Highs? appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos


    InvestorPlace is one of America’s largest, longest-standing independent financial research firms. Started over 40 years ago by a business visionary named Tom Phillips, we publish detailed research and recommendations for self-directed investors, financial advisors and money managers.

    Learn More