In just a few days, major stock indexes have made back more than half their losses, but technical analysts warn the market is setting up for a retest that will decide whether Monday's lows were the bottom.
The market has bounced with uncommon speed, after it fell at an unprecedented velocity from its February highs on fears of the coronavirus. It was the promise of a Washington fiscal stimulus package on top of an extraordinary amount of Fed policy easing that sent stocks rocketing from their lows.
"It's a low. It's too soon to say, it's the low," said Ari Wald, technical analyst with Oppenheimer.
The Dow jumped 6.4% Thursday, capping the best three-day move — more than 20% — since 1931. The S&P 500 was at 2,630, up more than 20% from its Monday low of 2,191.
"We were 35% off the highs and now we're 20% off the lows," said T3Live.com partner Scott Redler, who follows short-term charts. "The question is what are the levels that should be sold versus bought." He said 2,675 to 2,700 looks to be a level where investors could take profits.
"The market ignored the unemployment claims data, but as the market gets higher and the bounce continues, the corporate news is going to get worse, and it's going to be harder to ignore," Redler said. "I would think we definitely retest that low in the next few weeks."
As valuations climb, Redler said, the market should start to respond to negative news again. The expected ballooning of new virus cases is likely to make investors nervous. Companies will also be detailing some of the damage to their businesses during next month's start of earnings season, and as more data is released, the economic carnage will become more clear. The government reported Thursday that a record 3.2 million workers filed for unemployment claims last week, and those big numbers are expected to continue.
"When does that low get revisited? I would think mid-April when there's the reality of the corporate numbers as well as the potential closeness of a peak in U.S. and New York City cases," Redler said.
Technical analysts say the trading action this week was a key reversal. The S&P 500 fell to an important level, just under its last big low of 2,346, set in 2018, before bouncing back.
"It was important because it occurred following the biggest capitulation day in the market," said Wald.
Wald said it would be normal for the market to return to levels where it bounced from, as part of the bottoming process, and he expects the S&P 500 to retreat below 2,400 again.
"Very often after capitulation, it's common to test that low. It could be a marginally higher low," he said. "This rally could last three or four weeks, and then we test the quality of that bottom."