Why Wednesday is so critical for this rebound

Free After-Hours Analysis: 

The S&P 500 continues bouncing between big gains and losses depending on what is going on in the bond market that day. Treasury yields fell Tuesday and that sent stocks sharply higher as equity investors let out a sigh of relief.

The S&P 500 is trading really well and extending last week’s decisive capitulation and rebound. I love the way stocks are behaving but I have far less conviction about what is going in the bond market. That makes it hard to have a lot of confidence in the sustainability of this equity bounce because it is built entirely on the bond market keeping its cool.

But as I often write, the best trades always have uncertain starts. By the time we get more clarity, the discounts will have long since disappeared. And that means we have to get in before it feels safe.

I’m not convinced this is the last we’ve heard from the bond market. In fact, I believe higher rates will be responsible for the next recession and bear market. But this is a 6-12 months story, not a right now story. At least for the time being, equity investors are feeling better and there is a good chance this week’s bounce will stick.

Without a doubt I could be wrong, but for that to happen, we need to make a lower-low. Last week’s dip set a fresh low mark around 3,750 and as long as we remain above this level, everything is progressing well enough. While I’d love to see a new higher-high, at this point, avoiding another down wave is far more important.

That makes Wednesday a critical day for the market. Extend the rebound and all is good. Violate 3,800 support and lower-lows are in our immediate future.

The best part of being aggressive and buying the bounce early is that gives us a nice margin to play with. We should have already moved our stops up to our entry points. Few things are better than free trades and even if buying this bounce turns out to be a mistake, it won’t cost us much, if anything at all.

That said, I’m still expecting higher. Hold it together Wednesday and everything is setting up for a move to fresh highs.

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