Formula For The Bounce Is At Work

June 6, 5:00 pm EST

Stocks continue to bounce back today, driven by the signalling from global central banks that they will act, if economic activity deteriorates.

First we heard from Jerome Powell on Tuesday, the Fed Chair. He opened a prepared speech by saying they would “act as appropriate to sustain the economic expansion.” Today we heard from the second most powerful central banker in the world, ECB President Mario Draghi. He echoed the sentiment of the Fed, acknowledging the global trade war risks, and said they were prepared to act, if needed.

What does “acting” mean? It would mean cutting rates by the Fed. It would mean restarting QE at the ECB.

For now, it’s all an effort to verbally massage market sentiment. And it’s working, at least for the moment.

Add to this, we had some positive news on U.S./Mexico negotiations.

With that, let’s look at some key charts …

First, here’s a look at the S&P 500 …

We’ve had an 8% decline in stocks from the April 30 highs. And now we the break of the downtrend on the rebound of the past few days. And we’re back above the 200-day moving average (the purple line).

What about oil? As we discussed, the magic number in oil is $50. That’s the breakeven point for the shale industry, below which, they can not profitably produce.

After sniffing toward that $50 level yesterday, we had a big bounce today — almost 6% higher than yesterday’s low.

And finally, here’s a look at interest rates. This has been the most concerning market, as it has completely come unhinged from the current economic conditions — pricing in the worst case scenario for geopolitical tensions. But rates are showing some life today.

For technicians, as you can see in the charts above, we’ve traded into the 61.8% Fibonacci retracement in both oil and rates.

With technical support holding in these key markets, combined with the break of the downtrend in stocks, the worst of the market pain may be behind us (i.e. a recovery underway).

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