I would be careful in assuming the market is truly recovering in the short term. If you go back to last year you would see the same picture repeating itself on the chart. Starting March 2008 a stock market historically good month, to April, another winner and finally May, the shape of MACD is mimicking the current shape we are observing now one year later. In spite of claimed changing market conditions, we see a flat lack of momentum that has been in place now since April 20th. I would be quite cautious of calling this a real rebound.
March-April and May 2008, does this picture reminds of something? Yes, the same picture below in 2009.
And the what happened after a long period of a flat MACD/flat market:
In March-April and May 2008 implied volatility was high compared to its long-run average still lower than now. Volatility a gauge of market sentiment is still showing sub-optimal recovery (I will write about implied volatility applications in predicating catastrophic events in the near future).
What could make me more cautious in my predications are two factors: volatility fluctuations/spikes have improved since last year, and the large amount of cash infused into the system that would produce inflation leading to a market that would be fueled for a while at least. Nevertheless, seasonal market fluctuations most probably would persist especially we are still in a bear market officially.
What should you do?
Day traders may enjoy this none decided market. Swing traders will find it irritating by now. Those who enjoyed the long run to the upside should tighten their trailing stops a bit or take at least some profit out of the table. If you are still undecided where the market will go I would suggest a neutral option strategy on not so much a current popular target (such as Citi). Please note that there is no guarantee of positive results as there is no way to have perfect predications of market direction. Your chosen action is all your own decision. These are NOT trading recommendations.
My hunch is that either this rally will be fueled for a while longer (until the end of June and yes I see big money behind the current situation) and then starts its expected falling by mid to late July or it will fail earlier, that is late May, early June.
Disclosure: the author does not hold any Citi stocks or options positions.