These three market ‘tells’ point to more gains for stocks: Technical trader

After a tough session for stocks, some may see fit to question the strength of the recent bounce from the lows. But for Instinet's Frank Cappelleri, three indicators are flashing that the rebound has legs.

"It's been very tempting to sell into this rally, but we've been waiting for three separate things to happen before doing so," Cappelleri said Thursday on CNBC's "Trading Nation."

The first of what he calls the "three market tells" is the S&P 500's relationship with its 20-day moving average. Cappelleri points out that a break below this smoothing mechanism would tend to suggest further weakness — but that this hasn't happened yet.

Second, the S&P 500 has yet to fall 3 percent since the February lows. While a 3 percent drop would tend to "change the market's complexion," in his view, no dip has reached that notable level.

Finally, he points out that the S&P 500 has continued to make higher lows every week, another sign of momentum.

All in all, Cappelleri presents the message that the term "overbought" could easily be used to describe the current state of the market, but at the same time, "we could have used that label since about day five of the bounce."

To make money as traders then, "we have to use some simple rules" and "remove emotion" from the way one views the market, said Cappelleri, senior equity trader and market technician at Instinet, Nomura's equity trading firm.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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