Investors should buy into the stock market’s rebound rally on Friday, technical analyst Katie Stockton told CNBC.
“I know it can be a bit harrowing to buy into weakness like this,” she said, referring to the Wednesday-Thursday plunge that saw the Dow Jones Industrial Average, S&P 500 and Nasdaq each sink more than 5 percent.
“But once you have a little uptick in momentum, today should help,” Stockton predicted on CNBC’s “Squawk Box,” shortly before Friday’s Wall Street open. “I think we’ll see it manifest itself next week a little bit more.”
In early trading, the Dow surged as much as 400 points after losses in the past two session of nearly 1,400 points in total. Stocks paired those gains as the Friday session wore on and even turned negative for a while.
“You really want to be there for that first relief rally following this kind of price action, because that relief rally tends to be the most explosive. If you miss that, you tend to miss a lot of upside,” said Stockton, founder of Fairlead Strategies, which specializes in technical chart analysis. “You want to be there for that first up-leg regardless of the potential for a reset” of the low.
Stockton said the market internals are flashing their loudest collective buy signal since the Feb. 9 intraday low, which marked the bottom after stocks nosedived from then-record highs on Jan. 26.
The Dow dipped slightly below that low during the trading session on April 2, before really starting to march higher in July. On Sept. 20, the Dow closed above its January all-time. The Dow’s last record close was on Oct. 3.
After the market closed that day, Federal Reserve Chairman Jerome Powell said monetary policy was a “long way” from neutral, touching off concerns the central bank would hike rates more aggressively than forecast.
As of Thursday’s close, the market was extremely oversold, Stockton said. Only 11 percent of S&P 500 stocks were above their 50-day moving averages, she said. “It’s very rare to see those kinds of extremes.”
Those factors coupled with the rapid swing in investor sentiment from overly bullish in late August to overly bearish “tees up the market for a nice recovery, and very quickly too; next week even,” she predicted.
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