I mentioned we were close to a bounce in the stock market last Thursday evening and it looks like that is in fact what is getting started. Selling hit an extreme after basically closing lower everyday for over two weeks. While the markets will often stay oversold for longer than most expect, when it rebounds, it can be violent and painful for traders pressing their luck on the opposite side. Today’s gains weren’t off the charts, but the 1.6% gain in the S&P 500 was nothing to sneeze at either. While its easy to get caught in the moment, traders need to keep in mind that it is still a dangerous environment to be''excessively leveraged. Volume was lackluster on the gains and it is highly likely that this bounce will be short lived.

This doesn’t mean you shouldn’t take advantage of the strength, but traders need to keep overhead resistance in mind. In looking at $SPY, it is clear that a topping pattern has been completed. $SPY will likely bounce back towards congestion near 134-136 (Corresponds with S&P500 1340-1360) but it will be highly unlikely that it can push through it without significant selling pressure.

How the markets deal with overhead resistance will be key for traders, as a failure there could lead to the emerging of a deeper correction. In the meantime, focus on leaders such as $FIRE and $PCYC which have ignored the selling that has plagued the markets.

Good Trading,
Joey