Summary: Since the 20% fall in equities into Christmas Eve, equities have rallied 3 weeks in a row, gaining over 10%. So is the correction over?
Sharp falls of at least 15% have a strong tendency to have their original low retested in the weeks/months ahead. That is true even, as now, a sharp 10% bounce occurs. But what is notable this time is the persistence of the gains each week, and the exceptional breadth (participation) that has driven the indices higher.
This is important because, in the past 70 years, this has never taken place within the context of a bear market. In fact, breadth momentum like this is often associated with the start of new bull markets. Net: the Christmas low may still get retested, but it seems likely to hold and new highs are probably ahead. Nothing in the stock market is ever guaranteed, but this has been the consistent, historical pattern.
The bounce that started on Christmas Eve continued this week. SPX gained for a third week in a row, adding 2.6%. NDX was up 3% and small caps were up nearly 5%. Volatility fell 10% (table from alphatrends.net). Enlarge any chart by clicking on it.
The rally has brought SPX back to the area where it failed in mid-December and from which a 10% drop over 7 days occurred (green shading). The 50-dma (blue MA) is at the top of this range; it's been resistance since the September high (green arrows). As stated last week, there are a lot of eyes on this chart; expectations are that prior support becomes resistance and the rally at least stalls (or outright fails) here. A move higher (above the green zone) would therefore be noteworthy.
This bounce will face a seasonal headwind in the coming options expiration week. 15 of the last 20 January OpX weeks have closed down by an average of 1%. Risk/reward has been 3:1 down. It is the second worst week of the year (from Quantifiable Edges).