What will Make or Break this V Reversal?
- Arthur Hill, CMT
Stocks plunged into early April and surged into early May, suggesting that a “V” reversal is in the making. There are two parts to the V reversal. First, there is the V, which is the plunge and the rebound. Second, there is the breakout move that completes the reversal. SPY fulfilled the V part, but has yet to actually reverse the long-term downtrend.
The chart below shows SPY falling 20% from late February to early April and then surging some 14% into early May. This move created the V as SPY nears the 200-day SMA and the March support break. The blue-pink shading marks broken support turned resistance in the 575-580 area. We also have the 200-day SMA marking resistance here. Thus, SPY is clearly at a moment of truth. A push through 580 would break the 200-day SMA and negate the March breakdown. This would be bullish price action.
There is more to a V reversal than price action. TrendInvestorPro went back and studied four V reversals over the last 11 years. They all feature capitulation and a sharp V-shaped recovery. However, it is upside participation that holds the key to moving from bear market to bull market. We need to see a significant increase in upside participation and key breadth indicators cross specific thresholds. These indicators include the percentage of stocks above their 200 and 150 day SMAs, and High-Low Percent.
Exit strategies are just as important as entries. The Zweig Breadth Thrust and the 5/200 day SMA cross provided entry signals in April and May. Chartists now need an exit strategy. TrendInvestorPro put forth exit strategies for both signals and these are updated in our reports. This week we covered the gap zones in SPY and QQQ, long-term breadth signals, big moves in metals and continued strength in Bitcoin.