Why I’m Cautiously Bullish About The Market Right Now…
Major market averages pulled back last week.
Pullbacks are normal even in strong uptrends, so there is no reason for alarm — yet.
I’ll cover the “yet” shortly, but first let’s look at the pullback in context.
The S&P 500, as represented by the SPDR S&P 500 ETF (NYSE: SPY), pulled back to a sustainable trendline. The chart below shows this.
The initial rally off the October low was steep. In general, steep rallies are unsustainable because the underlying fundamentals don’t change that rapidly. That’s true even in these unusual times.
On November 9, news of a COVID vaccine sent stocks higher. That day is highlighted with the blue rectangle. In the next few days, we saw an initial attempt to surpass that high, which failed. This established the slope of the initial trendline shown above.
The next three trendlines shown above are predefined based on the slope of the first line. They are related to each other with Fibonacci ratios. [Read more: No One Knows Why This Ratio Works, But It Does…]
As I’ve noted before, Fibonacci ratios are useful in market analysis solely because they are widely followed. Traders at many large funds are aware of them because other traders are aware, and that explains why Fibonacci ratios should be considered in analysis.
Last week’s pullback brings us to the sustainable trendline.
Other Bullish Signs
Gains are possible based on the fundamentals. A vaccine could change the economic data quickly as it holds the promise of getting people back to work and unleashing pent-up demand.
Other indexes are also at important levels. Invesco QQQ Trust (NASDAQ: QQQ), an ETF that tracks the NASDAQ 100 index, also pulled back, ending the week at support that coincides with the upper edge of the recent trading range. I’ve highlighted this range with a blue rectangle in the next chart.
The uptrend would remain intact even with a relatively deep pullback. Support and a 38.2% retracement of the trading range coincide at $284.80. That’s about 6% below Friday’s close.
However, a test of that level is unlikely as long as momentum remains bullish. Last week, I showed the recent bullish crossover of the Profit Amplifier Momentum (PAM) indicator at the bottom of the chart.
PAM is specifically designed to change from bearish to bullish slowly. This reduces whipsaw signals, which are quickly reversed. Instead it focuses on the longer-term trend. This means it is unlikely to turn exactly at a top or bottom, but it’s likely to be on the right side of significant trends.
Based on the pattern, the price target for QQQ remains at about $333, about 10% above Friday’s close.
The technicals remain bullish and the potential rewards continue to outweigh the potential risks on a technical basis.
Yet, the risks on a fundamental basis remain high. There are risks associated with the complex logistics of vaccine distribution that are being addressed. But there are also new shutdown orders being implemented as the virus spreads ahead of the vaccine. This could slow the economic recovery, and that is a risk we cannot ignore.
While the weight of the evidence remains bullish in the stock market, the risks remain relatively high. Vigilance needs to be part of every investor’s strategy right now.
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