One may not think there’s a problem with a market churning upward, but that’s the reality right now. Specifically, a market with “straight-up” moves doesn’t leave room for solid charts to develop.
That’s the takeaway from James “Rev Shark” Deporre.
“The SPDR S&P 500 ETF (SPY) hit a low of around $428 last Friday morning,” Deporre wrote recently on Real Money. “Following a very strong earnings report from Alphabet (GOOGL) Tuesday night, it opened at around $456.50 on Wednesday morning - a jump of about 6.7% off the lows.”
According to Rev Shark, a bounce following the wild volatility and panic selling of the prior week is not a big surprise, but straight-up moves after a deep correction have become common in recent years.
“This phenomenon is likely due to a combination of manipulative computer algorithms combined with an inclination toward fear of missing out,” Deporre said. “The two interrelate and undermine the traditional technical analysis belief that stocks are likely to struggle as they attempt to overcome overhead resistance.”
That’s why V-shaped markets don’t allow solid charts to develop.
“Stocks go from oversold to overbought in a matter of days, and there is no consolidation or base building,” Deporre noted. “That’s a real dilemma when we must decide whether we want to take suboptimal entries and chase stocks higher or sit on the sidelines and hope that charts eventually will develop better entry points.”
V-shaped bounces are extremely challenging as they force traders to decide between chasing strength or waiting for better chart setups.
“The Fed hawkishness has been put on the backburner for now, but this is the issue that is going to drive the next dip in the market,” he added. “Be ready for some volatility.”
