The bulls finally got their bounce on Wednesday. But before you assume I'm going to throw cold water on the rally, which I am going to, it's worth noting that most overbought/oversold readings point toward a very oversold market. More importantly, the fact that equity markets didn't collapse under the weight of the British pound on Monday is probably the most convincing reason to be long stocks today.
Wednesday's session gave the bulls most everything they could have asked for. Yields dipped, the U.S. dollar pulled back, and tech stocks bounced while Apple AAPL lost ground. I'm not sure the bulls could've asked for more.
Well, that's entirely accurate. But I'll tell you what the bulls needed, and it's why I'm going to throw a little cold water on Wednesday's rally. We never got downside excess on the Invesco QQQ Trust (QQQ) , SPDR S&P 500 ETF (SPY) or iShares Russell 2000 ETF (IWM) , and that makes me believe we have more work to do at lower levels before a more meaningful low is established.
Can stocks trade higher from here? Sure. And if we're looking at the QQQ, as long price is holding above the session's volume-weighted average price (VWAP), I'll try to be long. However, to trust that a durable low is in place, I need to see price stabilize above the 21-day exponential moving average (EMA) or, preferably, when we're hunting for a low in a bear market, downside excess.
If you're unfamiliar with downside excess, I'm referring to the lower shadow on a candlestick (the wick) chart. Downside excess tells us sellers are no longer interested in selling when prices dip low enough. If the market reaches a level that cuts off selling or supply, the path of least resistance shifts to the upside.
The bottom line is that I believe we have further to go on the downside, but I'm willing to day trade long above each session's VWAP. However, I'm not yet interested in building a longer-term position until price is above the 21-day EMA or bearish excess is triggered.