Strength is Revealed in Pullbacks: 3 Subtle Signs to Look For
Strength in Pullbacks: 3 Subtle Signs
“If they don’t wear you out, they’ll scare you out.”
US equities have been stuck in a lengthy, frustrating, and choppy downtrend since mid-July. However, stocks began to rally back in late October as bulls took back control with vengeance. In fact, the S&P 500 Index ETF (SPY) chalked up its eighth straight session of gains on Wednesday. While the rally has provided some much-needed relief for bulls, those caught in the downtrend earlier probably realize the significance of the old Wall Street adage, “If the market doesn’t scare you out, it will wear you out.” After such a frustrating period, it can be understandable for investors not to want to get back into the market with both feet – especially for those who missed the recent rally.
Strength is Revealed in the Pullback
Though it may sound counterintuitive, the strength (or lack thereof) in a rally is best displayed in the first pullback. As the major US Indices become more and more extended in the short term, investors should closely monitor how the market acts when it inevitably retreats. Not all pullbacks are created equally. With that in mind, investors should look for three subtle clues, including:
A Pullback Through Time, Not Price
A pullback through time occurs when an asset corrects in a horizontal or near-horizontal fashion after a bullish move. Corrections of this nature indicate a healthy digestion of previous gains as anxious sellers are met with fresh buyers. In the event of a pullback, look for the major indices to hold the top half of last week’s gains. For example, the Russell 2000 Index ETF (IWM) launched higher by 7.5% last week and is down by 2.5% so far this week. If the bulls lose the top quadrant, it would indicate that sellers have regained control in the short term.
Image Source: TradingView
Hold of Earnings Gap
Ultimately, earnings drive stock prices over time. This quarter, several stocks, such as Pinterest (PINS), Netflix (NFLX), and Shopify (SHOP) gapped higher after better-than-expected earnings reports. If bulls are able to defend the earnings gap low, earnings-induces momentum will likely persist. Thus far, this is precisely what is occurring.
Image Source: TradingView
Breakout Retest & Resumption
Year-to-date, the tech-centric Nasdaq 100 Index (QQQ) is the leading index and has amassed gains of 41%. On Wall Street, leaders tend to lead in both directions. In the short term, investors should see if QQQ can hold its 50-day moving average. If the index successfully retests its breakout zone, a downtrend breakout should act as the final piece of bullish confirmation.
Image Source: TradingView
Bottom Line
Three subtle indicators are essential for investors to assess the market’s strength amid fluctuations. Make informed decisions by monitoring the depth of the pullback, earnings momentum, and pivotal zones.
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Today, See These 5 Potential Home Runs >>Netflix, Inc. (NFLX) : Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
Shopify Inc. (SHOP) : Free Stock Analysis Report
Pinterest, Inc. (PINS) : Free Stock Analysis Report
