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A Spring-Loaded Stock Market

Apr. 10, 2018 8:56 AM ETFXI2 Comments
Clif Droke profile picture
Clif Droke


  • Stocks still under pressure but vulnerable to short-covering rally.
  • A lack of bad news for a few days is all that's necessary to spark one.
  • Bottom signal hasn't yet been confirmed, however.

After a long, grueling four weeks the stock market’s immediate-term trend is still undecided as the major indexes are testing an important longer-term trend line. As I’ll explains here, while the market’s internal health remains weak and selling pressure is still an issue, an important development is taking place. Specifically, the stock market has become “spring-loaded” in a proverbial sense and could soon witness a major short-covering rally. In this report, we’ll discuss what could catalyze this rally and what needs to happen before we get the next confirmed broad market buy signal.

Stocks rallied during the first half of Monday’s session and regained most of Friday’s news-driven plunge. Yet by day’s end the major indexes surrendered nearly all their gains and closed only slightly higher. The S&P 500 (SPX) finished with a gain of 0.33% while the Dow closed only 0.19% higher and the NASDAQ Composite rose 0.51%.

Last Friday’s selling was clearly overdone as evidenced by the impressive bounce-back in the first half of the trading session. As we talked about in Monday’s report, the stock market remains vulnerable to negative news as long as its internal condition remains weak (as measured by the new 52-week highs and lows). But with NYSE market breadth showing signs of strength, a lack of bad news means the buyers have an incentive to keep stocks stabilized as best they can in an otherwise choppy environment.

The day-to-day headlines are symptomatic of the stock market’s recent volatility increase. Monday’s rally can be attributed to a de-escalation of trade war fears after weekend interviews from several members of the Trump administration gave Wall Street the impression that the White House is trying to tone down its virulent rhetoric against China. Treasury Secretary Steven Mnuchin assuaged investors’ fears by stating that he doesn’t expect a

This article was written by

Clif Droke profile picture
Clif Droke is an equity research analyst and writer for Cabot Wealth Network. He has covered equities and commodities, specializing in gold, since 1997 and is the editor of the Cabot SX Gold & Metals Advisor.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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