Wednesday is When the Rally Gets a Chance to Prove Its Mettle

Posted by jbrumley on March 22, 2017 9:31 AM

Was the rally that spanned the past five months the real deal, or was it all just a lot of hollow showmanship? We're about to find out. On Tuesday, the S&P 500 fell 1.25% -- the worst outing since October -- but worse than that, broke under some key technical support levels. In fact, it broke under ALL of its key technical support levels (at least the near-term ones), putting itself in a proverbial no-man's land below 2353. This is the first time the bulls have found themselves on the defensive in a long while, which could inspire an intense "fight or flight" response.

The big clue we'll start to see today, however, may not come as much from the S&P 500 itself, but from the VIX. It raced to, but not yet past, its ceiling at 12.9, and is in a position to hurdle it today. That would be the first time since January the VIX has been above that mark, but more than that, would confirm that a new uptrend from the VIX is budding.

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It won't be surprising to see the bulls push back - if you drop anything from high enough, it'll bounce. The question is, how far will that bullish pushback go? Some rather serious damage was done, and the S&P 500 will need to move back above its 20-day moving average line at 2370 to convincingly say Tuesday was just a blip. And upward move that falls short of that mark can just be considered volatility. And, should the S&P 500 move higher again and then end up closing lower than Tuesday's close of 2344.02, that will serve as a very convincing sign that the bulls have thrown in the towel.

Ironically, another stiff selloff on Wednesday could be rather bullish, flushing out the last of the would-be sellers and clearing the decks for a new wave of dip-buying.... buying on the dips is still a top-of-mind strategy for the crowd that doesn't want to accept the fact that the market is well overvalued.  Don't get too excited about that snapback rally following the next sizeable loss though. The market showed how vulnerable it was on Tuesday, and for the first time in months, most investors are starting to entertain doubts.

The next four to five days are going to be very interesting. Just keep an eye on the VIX, which should be a little less deceptive than the S&P 500 has been, and could be. And of course, should things go from bad to worse, the S&P 500's 50-day moving average line (purple) at 2324 is sure to be a battleground.

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