The past several weeks has undoubtedly been challenging for bulls in this market, as the S&P 500 has dropped nearly 10% from its all-time highs set in February. With trade tariff concerns, stagflationary signals from soft data such as ISM PMI reports, and extended valuations, the market has started to reset. The big question now is whether this is just the beginning of a larger decline or if a relief rally is on the horizon. While no one can predict the future with certainty, traders must focus on shorter timeframes and remain tactical. From a technical standpoint, there are indications that a relief rally could be in the cards.

Yesterday’s price action in broad-based indexes provided a notable signal that some short-covering activity may be underway. Additionally, investors appeared to be deploying capital selectively, targeting aggressively oversold stocks that do not fit the typical low-beta, low-volatility profile. Stocks such as Oklo (OKLO), Palantir (PLTR), and Constellation Energy (CEG) all gained over 2% despite the S&P 500 and Nasdaq-100 (NDX) closing lower. These names, typically considered more speculative, would not usually attract buyers in a full-blown risk-off environment. Another key observation is the selling pressure in consumer staple stocks over the past two sessions—an area of the market that tends to perform well during periods of economic uncertainty.

This shift suggests that some investors may be positioning for a short-term bounce rather than outright risk aversion. For now.

From a liquidity standpoint, the market remains thin, as reflected in the Book Depth of the E-Mini S&P 500. According to the CME Group Liquidity Tool, E-Mini S&P 500 Book Depth is at its lowest level of the year—excluding January’s LEAP expiration week, which is more mechanical in nature. This extreme lack of liquidity suggests that even a small increase in market participation could have an outsized impact on price action. If liquidity starts to recover, it may serve as a key signal for traders to cover short positions or allocate capital to oversold stocks. Historically, low liquidity combined with positive price action in high-beta names is not typically associated with continued heavy selling. While this does not rule out further downside, it does indicate that a counter-trend bounce may be imminent.

While uncertainty still looms, several technical and market-structure signals point to the possibility of a short-term relief rally. The rebound in speculative stocks, selling pressure in defensive sectors, and historically low liquidity levels suggest that the market may be setting up for a temporary bounce. However, traders should remain cautious and tactical, as broader economic concerns and external risks remain key factors in determining the market’s next move.

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