5 Reasons why Stocks bottomed this week and how long this rally can last

The upside follow-through looks likely to extend into next Tuesday/Wednesday and still looks quite premature to fade.  While this rally likely gets up to 4125-50 at a minimum, one cannot rule out a larger push higher if CPI reports show weakening headline inflation on falling gas prices.  However, I don’t expect this rally to go on non-stop throughout the month, and longer-term investors might decide to hold out and wait for weakness in the back half of September before buying dips in October.  Technically speaking, I’ll discuss some of the reasons for this week’s rally on the following pages, but continue to believe that sentiment remains an important piece of the puzzle along with cycles and positive market breadth for this past week at a time when many remain in disbelief.  At present, stocks should trend up into the CPI report and past this number into mid-week before possibly peaking out and turning lower. So, in a nutshell, I expect near-term volatility higher, then lower.  Have a great weekend.

5 Key reasons why Stocks rallied this week

  1. Financials and Healthcare both kicked into gear and outperformed.  These two groups make up 25% of $SPX alone.  Thus, our rally this past week was far more broad-based than many might have realized.
  2. Sentiment had gotten as bearish as we’ve seen since Mid-June with AAII Bears outweighing bulls by more than 35 percentage points.
  3. My Cycle composite shows strength into mid-September before a late month pullback.
  4. Breadth had gotten too compressed with the Percentage of $SPX stocks >20-day moving average having fallen under 5% early this week.
  5. Price/time confluence - As discussed in notes last Friday into this past Tuesday, some interesting Fibonacci relationships had surfaced (based on time) that centered on this period in early September for a rally into mid-September.
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