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.