Following a shaky start on Thursday, stocks found their footing and were able to preserve the gains from the bounce that started on Wednesday. The indices ended up flat and breadth was negative, but the underlying action showed that buyers were interested in putting cash to work and still had an appetite for speculative trading.
The last two days of action have given bulls some hope that the worst of the corrective action is over, but it is premature to jump to that conclusion. While market players have grown used to V-shaped moves in recent years, the danger of failed bounces within the context of a corrective cycle cannot be ignored. The essence of a correction is failed bounces and lower lows.
Market players will be intently focused on recent lows around 4,435 for the S&P 500, which also coincides with the 50-day simple moving average of about 4,434. That is a very important technical level, and if it does not hold it is going to trigger some problems and have an impact on sentiment.
Even if the correction action does pick up some traction again, the primary positive of this market is that there continues to be strong underlying interest by retail traders. There is still a high level of interest in stock picking, and speculative trading heats up very quickly when the market is stable. One of the primary reasons for this underlying support by stock pickers is that there has been such an unequal level of correction in the market. Many individual stocks have corrected far deeper than the indices and many big-caps. They are already washed out to a great degree and looking for support.
This disparity in the level of a market correction is easily seen by the fact that only 44% of all stocks are over their 200-day simple moving averages and only 43% are over their 40-day moving averages. By comparison, both the S&P 500 and Nasdaq are far above their moving averages and not even close to their 200-day levels.
The danger is that the indices will correct to the levels of the broader market and hold down the stocks that have already corrected, but as we see from the correct corrective action traders are focusing on good stocks coming off support.
We're looking at a negative start to the day, but that has been a better setup than a gap-up lately. I'll be focused on stock picking, but the danger of further corrective action is quite high.