Value-Seeking Buyers Drive Stocks Higher After Erasing Massive Losses

The major U.S. stock indexes posted a spectacular reversal late Thursday, erasing huge intraday losses while adding to the massive gains from Wednesday’s trading session. There were no notable changes in the news or the fundamentals, which usually means the rally was based on technical analysis.

For a second day, value-seeking buyers stepped as the markets approached a major retracement zone created by the Donald Trump Election Low on November 9, 2016 to the October All-Time Highs. Since reaching the top, the markets have corrected more than 50% of that trading range, creating a buying opportunity for value seeking investors.

In the cash market, the benchmark S&P 500 Index settled at 2488.83, up 21.13 or +0.80%. The blue chip Dow Jones Industrial Average closed at 23138.82, up 260.37 or +1.06% and the tech-based NASDAQ Composite finished at 6579.49, up 25.13 or +0.35%.

Although it’s too early to say the indexes have reached bottom, the fact that buyers are coming in on the dips is impressive. The rally on Wednesday was likely fueled by short-covering, but Thursday’s rally was probably supported by buyers.

Investors were disappointed early in the session due to the lack of follow-through to the upside following Wednesday’s strong gains. This led to sellers to erase nearly 60 percent of the previous session’s gains. However, one has to remember that there are nervous investors out there and they are afraid to buy strength. Especially since the markets are in a downtrend and just about every rally has been sold throughout December. Furthermore, the major indexes had just entered a bear market on Tuesday.

So as they say, “when there’s blood on the streets, it’s time to buy.” Although reluctant to buy strength, investors weren’t shy about buying the dip and it paid off. Investors may continue to be afraid to buy strength on Friday because the fundamental picture is still gloomy. Therefore, we could see an early high.

Since the rally is going against the short-term trend, we’re likely to see selling as the markets approach short-term resistance areas. Furthermore, since buyers came in on weakness on Thursday, they’ll probably do it again until the fundamentals get cleaned up. Only when the fundamentals line up with the chart pattern will investors chase this market higher. Until then, we’re likely to continue to see selling on the rallies and buying on the dips until the pattern is broken.