The recent stock market rally from the March 9 low has provided investors with a promise that things may get better in the economy, markets and exchange traded funds (ETFs). However, there’s still a lot of grim economic news that could lead to a long basing period.
Quite often when stocks settle into a basing environment, they are taking a pause and perhaps preparing for a sustained rebound somewhere down the road. Many traders now appear to be buying stocks in anticipation of a recovery at least four to six months from now.
In a basing period, stocks are in a long-term trading range, which might be narrow or somewhat wide, and this usually occurs after a major correction. During these periods, rallies off the bottom tend to be quick and short-lived. As stocks spike, they reach a level of resistance that they cannot break through. Then they decline again, testing their previous lows.
The trading range of the basing period typically is a function of the magnitude of the prior correction. Palash R. Ghosh for Dow Jones Newswires spoke to us about the basing period.