Buy the shallow pullback

Mid-week market update: After spending over two weeks in a narrow trading range, the SPX broke down out of that range yesterday and tested technical support at the 20 day moving average (dma), which was also the mid-Bollinger Band mark. At the height of the decline, the index had fallen 1% and the market was flashing short-term oversold signals.

When the market steadied soon after the open on Wednesday, I tweeted:

It appeared that the market had successfully tested 20 dma support:

In addition, short-term breadth measures (via IndexIndicators) had retreated to oversold levels that a bounce was likely.

Those conclusions are based on the combination of an intermediate term backdrop of economic and fundamental growth and powerful price momentum. Under such circumstances, market pullbacks are likely to be shallow and further all-time highs would probably follow soon afterwards.

Let me expand on those points.

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