Rebound or false bottom?

End of Day Update:

There was a little something for everyone today.  For bulls, this was another relief rally, adding 0.3% to Friday’s bounce.  For bears, we finished near the lows of the day as a lack of follow-on buying failed to fuel further gains.  While we finished near the upper end of the recent 1,910/1,940 consolidation, an early attempt to break 1,950 was rebuffed.  Ultimately few were motivated to trade today’s rebound and volume came in at the lowest level in several weeks.

The question on everyone’s mind, is the worst behind us, or is this just a bull trap before continuing lower?  If we use history as a guide, the last couple of times the market broke down, it temporarily found support before plunging one last time.  See the accompanying chart.  January 30th we traded to the upper end of a consolidation, but stumbled into a 60-point sell off two-days later.  Same thing happened to April 9th’s rebound, two-days later we were down 55-points.  The bullish takeaway from both plunges is they formed powerful capitulation bottoms that were excellent buying opportunities.

While some fear is dissipating as Western forces gain the upper hand in Iraq and Ukraine, markets remain on edge.  Another bad headline could send traders running for cover yet again.  But rather than fear the volatility, we should embrace it because one man’s panic is another man’s gain.

If I am right:
If buyers cannot push the market above 1,950, then we need to be wary of one last selloff.

If I am wrong:
If buyers shrug off further fearful headlines and continue bidding up prices, holding above 1,950 and the 50dma will signal the worst is already behind us.

Trading Plan:
As long as we remain inside the 1,910/1,940 consolidation, we are in no-man’s land and the market could break either way.  I would be reluctant to buy until the market proves the worst is behind us by reclaiming the 50dma.  If the market stumbles in coming days, that creates an interesting, but very brief shorting opportunity.

Jani