A Decisive Move for Stocks is Setting Up. This Could be Spectacular.

Stocks return to a “normal” trading pattern for now.

I’m seeing a distinctive move in the Bollinger Bands, which suggests that the real move, up or down, is starting to gel. Of course, the direction of the move is unknown. Yet, given the persistent doom and gloom, and the market’s proclivity to bounce in the face of unexpected, good news, I wouldn’t be surprised if the move is to the upside. Of course, there are no guarantees, thus investors should be prepared for just about anything.

Image courtesy of mediaistockphoto.com

Catching Up

Let’s recap. For the past couple of weeks, I’ve been focusing on the relationship of the S&P 500 to the Bollinger Bands in conjunction with its 200-day moving average. That’s because decisive long term trend changes are usually preceded by signature moves in the bands, which I describe in full detail in this video. Due to the algo fueled volatility we’ve now grown accustomed to, I’ve expanded the analysis beyond the traditional two standard deviations price variations (2SD, green lines) to three standard deviations (3SD, pink lines), four standard deviations (4SD, purple lines) and for good measure five standard deviations (5SD, brown lines).

Remember, sigma is a term that describes the “normal” statistical distribution of a system’s behavior. And although the stock market does not behave in a traditional statistical “normal” manner, the use of Bollinger Bands to measure volatility is useful in quantifying the market’s behavior in terms of what’s customary and what isn’t. Lately, the market has been way off its usual customary behavior. The “tell” sign that Chaos was in charge was the repeated breaks below the 2SD, 3SD, and briefly the 4SD lines. During that period, traders, humans and machines, completely lost their bearings and panicked. “Normal” system behavior suggests that a reversal to the means (normalcy) will eventually come. “Normalcy” in these cases usually follows a major event.

Just to reference, the most recent tag of the lower 4SD line, happened at the bottom in March 2020 when the Fed opened up the QE spigots. Yesterday’s “tariff pause” seems to have done the trick, at least for now.

The Setup

The SPX chart suggests that a big move is coming. Focus on the green bands (2SD) above and below prices. Because the index has returned to trading inside these bands, the market’s price action is now back within the “normal” range. That means that the system is stabilizing and that traders are refocusing on trading not freaking out. Now you can see this returned focus on trading exhibited in the much smaller price fluctuations of the current session after yesterday’s massive reversal which followed the tag of the 4DS band.

Moreover, the 2SD lines are starting to squeeze around prices. This is usually the prelude to a big move. Because there is so much pessimism and the market is so oversold, “normal” behavior would favor a move to the upside. We’ll see if this holds up. And just to be clear, I’m not calling for a bottom. I’m just saying that if yesterday’s reversal proves to the bottom, then the next big move should be to the upside, unless the historical norms in the system no longer work.

Where we are.

Let’s review the current sentiment background:

The S&P 500 (SPX) delivered a Four Sigma tag of an important support level, the lower Bollinger Band which corresponds to four standard deviations below the 200-day moving average (pink band). This is abnormal behavior. SPX is now trading inside the 2SD (green band), a “normal” trading level. Keep an eye on the 5272 level and the 4850-5000 range if 5272 fails to hold.

Bearish sentiment reached rare levels of pessimism. This is especially true of the CNN Greed/Fear Index (GFI), which closed at an Ultra Extreme Fear reading of 3 on 4/9/25. It rebounded to 20 or so on 4/10/25 after the tariff reversal news. As I write, it’s at 7. This is as bullish a contrarian picture as it gets.

The CBOE Volatility Index (VIX) closed above 50 on 4/9/25. It retreated on 4/10 but is rebounding this morning nearing the 40 level. This is a contrarian bullish setup.

The U.S. U.S. Ten Year Note yield remains above its 200-day moving average but has responded positively to a better than expected CPI report which suggests that the rate of rise in inflation may be slowing.

The New York Stock Exchange Advance Decline line (NYAD) is still showing some weakness as it tests its recent support area. On the bright side, the RSI is close to 30, an oversold level which under “normal” circumstances suggests that the downside may be short lived or limited.

Thus, during these times it pays to:

• Have lots of cash on the sidelines;

• Shed no tears if you’re stopped out as it raises your cash levels;

• Hang on to long term core holdings; and

• Review and refine your shopping with the goal of deploying it as conditions improve. I’ve been adding very small lots to positions lately but I’m not triple mortgaging the house to buy stocks on margin.

Bottom Line

The financial markets got a reprieve with the tariff “pause” on 4/10/25. The stock market seems to be back in a “normal” behavior pattern. This is a good time to refine BUY lists and to slowly deploy small bits of capital into the market with the full knowledge that sell stops may still get hit and we may be right back where we started again.

Let’s see what happens.