Stocks ripped higher this morning as all three major indexes enjoyed big-time, bounce-back gains. The Dow, S&P, and Nasdaq Composite rose 1.4%, 1.8%, and 1.7%, respectively.
Small caps saw the biggest boost, though, as represented by the iShares Russell 2000 ETF (NYSE: IWM), which jumped 2.2% shortly after the market opened.
Does that mean the “transitory tantrum” is already over?
Yesterday, Powell shocked bulls when he said it was “time to retire the word transitory regarding inflation” and that the “threat of persistently higher inflation has grown.”
The icing on the bearish cake came only a moment later when Powell added:
“At this point, the economy is very strong, and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases […] perhaps a few months sooner. I expect that we will discuss that at our upcoming meeting.”
Stocks unsurprisingly scorched lower in response.
But today, everything’s up again. Yesterday’s losses have almost entirely been erased. And, like over much of the last year, dip-buyers may have another huge opportunity on their hands.
Many analysts thought so, too, including those who had reservations about another rapid selloff in the coming days.
“Our sense is that the recent selloff is a longer-term buying opportunity. However, investors that want to avoid a potential big drawdown (while giving up some potential upside) may want to wait until the [Fed’s] Dec. 15 meeting,” wrote Wolfe Research strategist Chris Senyek in a note to clients.
But for traders looking to scoop up some quick gains, December 15th is too long to wait. A big move would likely happen above today’s high should the S&P close at its current price.
The S&P (as represented by the SPY) is in the process of completing a classic bullish reversal formation. In terms of daily candlesticks, the index closed below the lower Bollinger Band – an indicator used to identify when a traded asset may be considered oversold – before potentially closing above it today, provided that the S&P closes at its current price.
Many counter-trend traders would go long above today’s high with this formation. The same type of formation also occurred on Monday, when the index closed above the lower Bollinger Band after closing below it on Friday.
But the S&P didn’t trade above Monday’s high. Therefore, the bullish reversal didn’t actually happen.
At least, not yet.
If stocks are going to make another run, they’ll likely do so in the next few days should the S&P close above the lower Bollinger Band this afternoon and take out today’s high in tomorrow’s trading session.
Conversely, the market could just as easily collapse if yesterday’s low fails to hold, as it lingers near key support at 4,550. That price level previously served as resistance at the S&P’s early September high.
The market already seemed very fragile over the last few months. Now, it’s become even more so following yesterday’s plunge. But the major indexes also look like they’re just another strong trading session away from a quick jump higher.
So, as the market rolls into early December, be mindful of its seasonal tendency to rise. If a breakout above today’s high occurs, a massive “Santa rally” could easily follow. If stocks retrace, though, it could prove to be a rough Christmas for bulls as investors realize the seasonal trend has failed.
