Two weeks ago, it looked like the market would never bottom. And now, SPY has rallied 26% off the lows, forming a higher swing low and higher swing high in the process.

The short-term downtrend is officially dead and bulls have established a foothold. Whether their bid to recover the miles of lost ground proceeds to turn the intermediate and long-term trends back up remains to be seen.

But this is a victory to be celebrated for stock owners across the land. It’s granted a massive reprieve to wounded portfolios. My passive accounts have certainly recovered a great deal over past two weeks.

From a trading perspective, the turn is a welcome development because it’s finally providing some support and resistance zones we can trade around.

Yonder Lies a Higher Low

Let’s analyze the structure of the S&P 500’s price action. Remember, it’s not the day-to-day action that matters near as much as the relationship between pivots.

Spectators on the lookout for a bottom want to see a double bottom or inverted head and shoulders pattern. Think about both setups in terms of pivots. The double bottom is formed by an equal pivot low. The inverted H&S pattern comes when you see a higher pivot low. Both developments signal an increase in demand, particularly the higher low. It reveals that buyers have stepped up quicker than during previous drops.

For example, the last downswing in SPY persisted until bulls finally fought back at $218.26 on March 23rd. Then the long-awaited and desperately needed oversold bounce began. It ultimately terminated at the falling 20-day moving average. The next downswing lasted all of one day before buyers swarmed to form a new, higher support zone at $244.50.

Monday’s powerhouse rally confirmed support and even blasted through resistance to form the first higher pivot high we’ve seen since the market meltdown began.

And now its official. The short-term trend is pointing higher.

What Actions Do You Take?

To preface my next few comments, let’s make a few things clear:

First, the market changes so quickly that anything I say today could be irrelevant tomorrow.

Second, my intent is not to provide advice, but rather teach you some best practices of how to think about responding when certain signals arise.

Monday’s rip was the tell to reduce bearish exposure. If I entered short trades on the bear retracement pattern that triggered on April 1st, then I would have exited some yesterday.

Place an alert near $244. That is the new support zone that needs taken out for the uptrend to reverse back to a downtrend. As long as it holds the uptrend is intact.

Take this recovery a day at a time. We’re still below the 200-day and 50-day moving average so much work remains before the damage has fully been healed.

Unfortunately, deciding when to deploy capital is always a matter of preference. Wait too long and the market has already fully recovered and you missed the bargain prices. But buy too quick and you may have to sit through a lot of pain before the bottom is finally found.

No one knows if the ultimate low is in, but there’s no denying the short-term trend has turned higher.

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