The selloff last Friday brought back some volatility into the market. So far today, we are seeing a pretty strong bounce, but not impressive enough to change the overall technical picture. There are three main scenarios for the stock market in the next few weeks, listed in terms of probability:
1. SPY and QQQ enter into a wide, choppy range. Breakouts won’t work as well in this environment compared to the last 2-3 months. Mean-reversion trades will have an improved likelihood of success.
2. After a brief consolidation below their 50-day moving average, SPY and QQQ continue lower and test 210 and 110 respectively. Short-term volatility futures could go in backwardation under this scenario.
3. Quick V-shaped recovery to new all-time highs. This seems the least likely, but it is good to have an open mind and more importantly, keep a watchlist with stocks that have held well during this minor pullback. Those stocks are the new leaders.
