Why the Stock Market Could Be Ready to Turn After Tuesday

NYSE Trader

The market exploded higher on Tuesday on hopes of progress on the Iran situation. Iranian leaders said there is “no truth to the claim of negotiations with any party in Iran,” but also confirmed that Iran is “exchanging messages directly or through our friends in the region.” 

There is communication of some sort, and President Trump stated that he feels he has already won the war since he has eliminated Iran’s nuclear capabilities.

There are obviously still some very substantial obstacles, and the fact that oil only fell about 2% is not encouraging. However, conditions are ripe for some sort of relief bounce. The doom and gloom was extremely thick on Monday. There wasn’t panic, but there was despair, and that is often a sign that the selling has become extremely overdone.

Why Tuesday Had the Right Setup

The extreme negativity, combined with the end of the first quarter, created good conditions for a bounce, and the news was good enough to give buyers some hope that this was a major turning point.

This is classic day one action. There was a very sizable, broad jump that caught many investors off guard. Breadth was close to 80% positive and the S&P 500 was up over 2.5% and closed at the highs of the day. That is a perfect start, but what is needed now is confirmation.

What Needs to Happen Next

The next step is to avoid testing the recent lows. Some pullback and consolidation is not only acceptable but positive at this point. We want to see support forming. If there is still some skepticism, that is a good thing. We need to climb a little wall of worry here.

The most important development we need now is a follow-through day. Investors Business Daily looks for a follow-through on days four through seven. Tuesday is day one, so day four would be Friday. To qualify as a follow-through day the gains must be 1.5% to 2% or more and must come on higher volume. That will be the signal that institutions are buying and looking to establish a new trend.

Don’t Get Ahead of Yourself

Keep in mind that big days like Tuesday tend to occur in the worst markets. They cannot be relied on as an indication of a turning point. They are a function of poor positioning, excessive negativity and strong emotions. It is the failure of bounce days like this that delivers the real pain of a bear market.

I’m hopeful we will see a follow-through day but I’m not counting on it at this point. There is still a lot of uncertainty about the Iran situation, and I don’t like that oil is staying so strong.

Have a good evening. I’ll see you tomorrow.

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At the time of publication, DePorre had no positions in any securities mentioned.