The Problem With Wednesday's Gain

Posted by jbrumley on September 30, 2020 5:44 PM

Stocks may have logged a gain on Wednesday, but it certainly wasn't the one the bulls wanted. Roughly half of the intraday gain was given back, and the S&P 500 ended up closing right at the 50-day moving average line it had hurdled earlier in the day.

And that's not the worst of it.

The chart below tells the tale. Following through on the rally started late last week, the S&P 500 finally pushed through that potential technical resistance, reaching a high of 3393.56. It didn't hold onto those gains though. The index peeled back to a close of 3363.0.

That's a problem. It suggests the bulls don't have the conviction needed to hold their ground when the risk reaches above-average levels.

Perhaps worse, the 20-day moving average (blue) is now below the 50-day moving average line (purple) for the first time since April, when it was on the way back above it. It's a sell signal in and of itself.

It's too soon to say with any certainty this is the end of the road for the budding rally effort. The bulls may take another swing, or two, or three or four. This first foray into new territory, though, isn't encouraging.

The smart-money move to make right now is doing nothing. Wait and see how this pans out. It could take days to see. The S&P 500 may need to test its floor at the 100-day moving average line (gray) again to regroup and make the next breakout effort. That pullback may not stop at the 100-day line though. Or, it may not happen at all. The index might start to climb again tomorrow and close above Wednesday's high of 3393.56.... the only solid clue that this wobbly effort thus far has solidified enough to trust. Either way, bear in mind there's an opening gap between 3306.88 and 3332.91, left behind with Monday's strong open. That gap will beckon the S&P 500 lower, perhaps starting a pullback that could have otherwise been avoided. That small pullback may be the beginning of the one that drives the index other the 100-day average.

But, first things first.