A bullish outside day proved bullish for the remainder of last week
“IMF says global growth is expected to decline and downside risks to intensify as major policy shifts unfold.”
- Briefing.com, April 22, 2025
“The Citigroup strategists joined a band of Wall Street Heavyweights including Bank of America Corp. (Jefferies) and BlackRock Inc. that have turned cold on US equities as uncertainty about the endgame for President Donald Trump’s trade policies raise the specter of a recession.”
- Bloomberg, April 14, 2025
“Hedge Funds Lose Market Conviction, Except for Shorting U.S. Stocks”
- Bloomberg, April 29, 2025
Economic views among international organizations and sell-side research firms have dimmed, leading to more bearish positioning than usual among active money managers. This souring outlook on both stocks and the economy set up a potentially pivotal trading session last Wednesday.
“The good news for bulls is that with the 5,400 - 5,460 area cleared, a new potential floor has been established with former resistance now acting as support… the SPX remains above its 36-month moving average, a trendline that was never violated during the pullback. As such, the longer-term uptrend is intact and this suggests that pullbacks should be bought, as the retail investor did”
- Monday Morning Outlook, April 28, 2025
On Wednesday morning, before the market’s 9:30 a.m. open, the major headline was that the U.S. economy contracted 0.3% in the first quarter. The knee-jerk reaction was selling, but what was notable was the S&P 500 Index (SPX – 5,686.67) low at 5,433, in the middle of a support area between 5,400 and 5,460 that I highlighted last week.
Moreover, the reversal from that level was impressive, with the SPX closing higher on the day after dropping more than 2% on Wednesday morning, forming a bullish “outside day” candle and conquering its March lows in the 5,500-5,530 area.
Long-time readers of this commentary might recall the multiple bearish “outside day” candles that formed ahead of weak price action in 2024. But in last Wednesday’s trading, with the low below the prior day’s low and the high and close above the prior day’s high, it was a bullish outside day that proved bullish for the rest of the week.
Senior Quantitative Analyst Rocky White researched past instances of SPX bullish outside days since 2010, and compared the research to those in which the low of the day was at least 1% below the prior day’s close, which would define last Wednesday’s bullish outside day. In summary, beginning with the two-week period after the signal and through the following three months, the outlook favors the bulls. And even though the one-day outlook did not favor bulls, the SPX rallied.
In the context of sentiment backdrop – a big short position in the market, and dire economic expectations – last Wednesday’s bullish outside day and historical data are worth keeping in mind, especially following a negative gross domestic product (GDP) reading.
This is true whether you are a short-term trader or long-term investor, who stayed the course after the SPX troughed last month just above the key January 2022 peak and its 36-month (three-year) moving average. As I have observed before, the latter marked important bottoms on four of six occasions since 2011, despite not being on many technicians' radars (see second chart below).
A plus if you are a short-term bull is what appears to be an unwinding of extreme negative sentiment among option buyers on SPX stocks. Note that the 10-day, buy-to- open put/call ratio on SPX components has begun rolling over from levels from where it rolled over in the past year, all of which marked important bottoms. This means we could be on the cusp of major upside.
Support heading into the week is at 5,530, which is 10% below the February closing high and the area of the March lows. Potential resistance resides between 5,740 – its 12-month moving average – and 5,783, or the Election Day close in November 2024. The 200-day moving average at 5,745 is sitting nearer the lower boundary of this range.
For what it is worth, the 12-month moving average has marked resistance or at least a hesitation level on rallies from the 36-month trendline in the past, albeit not on every occasion.
Todd Salamone is Schaeffer's Senior V.P. of Research
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