After a remarkable showing in March (and a strong start to April) for the overall markets, traders across the world are asking themselves the same question … will this rally keep going?

Today, we’ll examine the reasons for the stock market’s recent strength and try to determine how far this bullish momentum can go.

What started as a small uptrend on the SPDR S&P 500 ETF Trust (NYSE: SPY) has now turned into a multi-week rally — the first of its kind in months. 

The index is up 5.5% in the past month and more than 12% in the past six months. These gains are especially notable considering the SPY averages 9% gains per year.

After a brutal 2022, the market is overdue for some relief.

That said, the SPY will need to clear some major technical hurdles before we can really trust this move.

As we approach an important crossroads for the SPY, the question is this…

Can this multi-week rally evolve into a multi-month uptrend for the major indexes?

Keep reading to see my answers to these questions (plus more)…

Why Are Stocks Rallying?

First, let’s see if we can determine why stocks have been so strong over the past six weeks…

The Fed is Slowing Down

For the better part of two years, the market has been furiously discounting a variety of negative catalysts…

Record-high inflation, looming interest rate hikes, and a possible world war have all been weighing heavily on the minds of traders since November 2021.

But more than anything, the focus has been on the Fed. 

For over a year now, the only possible outcome of Fed meetings has been further hawkishness from the central bank.

Hiking interest rates and restricting the money supply have been the primary directives of the Fed since inflation started surging.

But now, the narrative seems to be shifting as 2023 has brought some (slight) relief to the inflation concerns…

The February CPI report showed a 0.4% month-over-month increase in goods and services, an improvement over the 0.5% reading from January. 

Meanwhile, the all-items index increased 6.0% for the 12 months ending February — the smallest 12-month increase since the period ending September 2021.

With rates already near 15-year highs, many economists are now suggesting that the Fed can’t go much further when it comes to restricting monetary policy. 

And in the recent FOMC minutes, Fed officials confirmed that inflation is headed in the right direction, saying “Reflecting the effects of less projected tightness in product and labor markets, core inflation was forecast to slow sharply next year.” 

Bottom line: A Fed pivot toward flat monetary policy (i.e. no longer hiking interest rates) could be a hugely bullish catalyst for stocks.

Less Uncertainty

I’ve said it before and I’ll say it again … the market hates uncertainty more than ANYTHING.

And I think a large part of the uncertainty that plagued stocks last year has been solved. 

Let me explain…

2022 was filled with trader anxiety around what might happen on a variety of issues.

How bad will inflation get? How far will the Fed go to fight it? And what will the policy’s effect be on corporate earnings?

While we can’t see the full picture yet, big parts of these questions have been answered already. 

Inflation got as bad as any analysts expected, causing the Fed to hike further (and faster) than it has in decades.

These changes have been in place for long enough now that many of the policy’s effects on corporate earnings have also taken place. 

Bottom line: There are fewer unknowns today than there have been in some time … and this is something the market tends to react positively to. 

The Indicators I’m Watching Closely

The market is at a crossroads right now — just like we are as traders.

If the major indexes can hold their moving averages and avoid a major sell-off later in the week, the technicals will show all of the signs of setting up for more upside.

On the other hand, if the bullish momentum stalls out at any point, that could provide a slam-dunk entry for shorts on a variety of stocks. Be cautious of a potential rug pull at any time. 

So, what’s my game plan? What specific levels am I watching? And what do I need to see to make a definitive call on the market’s near-term direction?

The most important chart to me is the SPDR S&P 500 ETF Trust (NYSE: SPY)…

I’m watching the $415 level as resistance and $408 as support. A break above $415 would be very bullish, while a break below $408 could lead to this entire rally unwinding.

Coming off of this rally, the first red day will be crucial. If it erases a large part of the gains from the past four days, that will be an extremely bearish indicator.

But if the first red day brings healthy consolidation (without a brutal sell-off), and the SPY holds $408, I’ll be much more inclined to get bullish.

And so far, it’s looking like healthy consolidation is taking place. At the time of writing on Monday, the SPY is practically unchanged, down only 0.16%.

If the SPY consolidates a bit more and then surges beyond $415, that’ll be a very encouraging sign for the stock market.

Final Thoughts

We’re at a crossroads in market sentiment and sitting near a critical price level on the most important chart in the world. 

It’s a good time to be patient and wait for a clear trend to emerge. For me, this is all about the key levels on the SPY chart…

Watch closely and trade accordingly!