Bracing for more pain

In theory, stock prices should be poised to rally. The SPX is testing a key support zone dating back to October 2014 and it is experiencing positive divergences on the 5 and 14 day RSI. If it did bottom here, the initial target would be the first Fibonacci retracement level at about 1935, with further resistance at about 1975 and 2010.

The bulls are set up for some short-term disappointment. I wrote on Sunday that I expected further stock market weakness ahead for this week because momentum was weak and readings were not oversold (see Waiting for the market to heal). Monday's market action did not disappoint that forecast.

The omens were positive for for a bullish reversal on Wednesday. Overnight, the shares of Deutsche Bank soared on a rumor of a buyback of its senior debt as a demonstration of its balance sheet strength and European bourses rallied in sympathy. At one point, ES futures were up over 1% in the overnight market. By the time the dust settled at Wednesday's close, the SPX was flat on the day.

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