Stocks are trading sharply higher on a surge in optimism caused by a slowdown in coronavirus cases and deaths. While the numbers will continue to rise, hotspots in NY, Italy and Spain are reporting better numbers and raising hopes that containment measures are working.
The primary question that remains is whether the trajectory in the worst areas will start to occur in other areas that have been less affected or while social distancing and containment prevent the parabolic rise that occurred in New York and Italy. There are signs that the shutdown of the economy is working, but it is unlikely to be a smooth rise.
A retest of the S&P 500 lows that occurred on March 23 around the 2200 level would have made for a better setup of a bounce at this point, but this is a market that is determined to frustrate both bulls and bears. At this point, this is just another sizable countertrend move with significant resistance at the recent highs around 2630-2650. A move over that level would be a significant change in the technical picture.
Currently, the S&P500 is looking to fill a gap on the chart that was created on the morning of April 1 between 2522 and 2584. Short-term resistance is at 2450.
Market players are obviously hopeful and optimistic. Everyone wants to move past this crisis as fast as possible and there is a tendency to be more optimistic about data than may be justified. There are still some very big gaps in knowledge due to the limited testing in some cases. What is particularly important is whether the areas that are weeks or months behind places like New York can avoid the same horrible trajectory. There are some solid clues that the New York situation is not inevitable elsewhere, but we won't know for sure for a while.
With the hope that coronavirus cases may be topping, the next question is the economic ramifications. The sooner coronavirus tops the sooner the economy can return to work, but there will continue to be need for social distancing and isolation for many months to come. The economic disruption is not going to suddenly disappear, however, we will have some better clues as to its economic impact.
At this point, the market action is index driven and is highly correlated. Volatility remains very high and there is little distinction between individual stocks. As we move into the first-quarter earnings season in the next few weeks, this is likely to change as market participants start to focus more on how individual stocks are impacted.
On Monday morning, there will be many market players believing that the worst is over and that this isn't just another countertrend bounce. There will be a fair amount of FOMO (Fear of Missing Out) by those holding high levels of cash. There is no way to know if the market is heading straight up from here, but the way to approach it is incrementally. Small buys with stops at recent lows is a good way to start, but charts just don't favor doing much buying yet. They may set up higher or lower, but healthy charts are what reduces risk. Don't be too quick to throw money at this action.