October 29, 2009 at 9:51 pm | | Comments 0

Oversold Bounce or Higher Low?

Following an impressive surge higher from early October, the market has finally taken a breather.  The pullback of the past week has offered at least a short-term change of character that has my attention – and yours as well, I’m sure.

Downside follow through has been notably absent for some time now…until this week.  Four consecutive declines began with last Friday’s reversal from the highs in the NAZ (2190), and ended with Wednesday’s punishing selloff.  Thursday’s bounce was headlined by a near-200-point jump on the DJIA, but under the surface we saw the NAZ post an inside day.  The S&P 500 erased Wednesday’s losses, but on declining volume.  Mixed signals, to say the least.

Looking at the daily charts of the indexes, a case can be made for more than one scenario here.  We are in well-defined uptrends, and the dip of the past week could again get bought and prove to be yet another higher relative low within the trend.  But by the same token, the bounce we saw on Thursday could merely prove to be a relief rally after the harsh selling which put the market short-term oversold.  It’s hard to place my entire weight on either scenario just yet, as more technical evidence needs to be seen to support one or the other.


Chart courtesy of Worden

So at this point, I’m making zero predictions.  This isn’t a spot to buy blindly and bank on another rally straight back up to new highs.  The selling intensity we just saw wasn’t like the modest pullbacks which preceded it.  It was a little more vicious and a little more ominous.  It could be the start of a change of character.  And this isn’t a time to call for a market top and start shorting the daylights out of every name out there.  The intermediate trend is still up, and that should be respected.

I’m expecting the next few days to carry some significance.  Either the bulls prove themselves yet again, or the bears build on their newfound confidence and we see another leg down begin to develop.  Personally, I don’t care which side wins out – I have no bias.

My approach is to stay very short-term for the next couple of sessions, day trading for quick moves in this increased volatility, and see what happens.  Many stocks broke down hard and have the potential to construct bear flags and rising wedges if the rebound loses momentum and volume continues to sag.  I’ll be watching those bounces intently.  Other stocks still aren’t far from their highs, so I’ll observe them closely for signs of real strength returning – not simply a relief bounce of one day.

Both the bulls and bears have something to prove these next few sessions, so it could wind up being a pretty good battle.  No matter what, volatility is picking up, and that’s a great thing for us as traders.

So stay objective out there, anything is possible.  Expect surprises in both directions.  We’re getting into the best season for trading in the next several months, and I’m excited about it!

Trade Like a Bandit!

Jeff White

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