Why I Expect A Big Move In The Next Few Days…

Last week, I noted in this article that SPDR S&P 500 ETF (NYSE: SPY) pulled back to a sustainable trendline. Because of that, I expressed some cautious optimism about the market over the coming weeks.

The chart below uses a blue rectangle to highlight the market action since then.

As I noted, the initial rally off the October low was steep. In general, steep rallies are unsustainable because the underlying fundamentals don’t change rapidly.

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, which 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, which explains why Fibonacci ratios should be considered in analysis.

So far, this pullback held the sustainable trendline.

That means we are now at a critical level at a critical time.

Looking Ahead

As I write this, it looks like Congress will approve a spending and stimulus bill. I’m warning you this will sound meaningless, but the market could move either way after details of the stimulus bill are announced. That’s important because the move is likely to be big.

The bearish case is based on history. Traders often “sell the news,” meaning they buy in anticipation of an announcement and sell when the news is released. This idea dates back to at least the Napoleonic wars in Europe.

The bullish case for the market is based on the fact this bill will provide economic stimulus. At $900 billion, the stimulus represents more than 4% of GDP. That should boost consumer and business spending and has the potential to move stocks higher.

So, it’s reasonable to expect a big move in the market after the stimulus is finalized.

My indicators tell me the move is likely to be up.

The Profit Amplifier Momentum (PAM) indicator for SPY is shown at the bottom of the next chart.

Action To Take

PAM is specifically designed to change from bearish to bullish slowly. This reduces whipsaw signals, which are quickly reversed. It focuses on the longer-term trend. This means it is unlikely to turn exactly at a top or bottom but is likely to be on the right side of significant trends.

PAM is slightly bullish and has been for the past three weeks. The pattern in PAM is similar to the pattern seen at the beginning when a narrow range in the indicator was followed by a large move in the stock market. At the time the bear market began, PAM was slightly bearish.

Just like last week, the weight of the evidence remains bullish for the stock market, but risks remain relatively high. A downside break will drive a change in my opinion because I believe it’s important to adapt to the market action as it unfolds.

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