Stock Market Bear Trap or the Start of a Correction?

Was yesterday’s move just another bear trap like the many we have witnessed since the bottom of 2009 or is this a genuine reversal point for a short-term correction? About a week ago I warned that this rally is over-extended and the probability of a short-term correction has increased. But bears should not expect to get an extended downtrend. At this point the technical picture for SPY shows strong support at the 50-day moving average and near the low of last month.

SPY_20130501

The technical picture is pretty clear from the above chart and any bear who tries to rationalize otherwise is experiencing cognitive dissonance.  Stock market bears who see that the market is on a strong uptrend since the beginning of this year try to rationalize their position by blaming the FED, QE and claiming that the market is manipulated. This is a terrible psychological state of cognitive dissonance, similar to what a smoker experiences when he knows that smoking kills but tries to rationalize his decision to buy cigarettes by denying the validity of the studies that show a high death rate amongst smokers.

Strong support for SPY is at the April low of $155.43 and at the 50-day moving average near $153.50. Beyond that, something remarkable must happen to get a continuation of a downtrend. Yes, bad things can happen at any moment. But right now the probability of a short-term correction down to those technical levels is very high and the probability of a downtrend after that extremely low.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours..

Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/

Disclaimer

Related post

http://www.priceactionlab.com/Blog/2013/04/the-probability-of-a-market-correction-has-increased/

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