End of Day Update:
Stocks bounced decisively from yesterday’s lows, reclaiming 2,000 support and the 50dma. The 2% move was the largest gain since 2013 and came on the highest volume we’ve seen since the pullback started.
The headline catalyst was continued accommodative language from the Fed and Janet Yellen. While they didn’t specifically say recent global turmoil would delay interest rate hikes, that is the way many traders took it.
A gain is always better than a loss, but it is usually safer and more sustainable to see the market grind higher in more measured steps. Huge moves often result in equally dramatic moves in the opposite direction. That’s clearly been the case over the last three days. Will we see more of the same tomorrow? Only time will tell.
The last time we saw an equally impressive up-day was October 10th, 2013 as the market also rebounded from a dip under the 50-dma. While the market held those gains and eventually climbed another 100-points over the next two months, the moves immediately after the 2% gain were much slower. If that situation plays out again, there will be plenty of time for traders to jump on board the rebound.
The risk is if the selling isn’t over and we see another equally dramatic move lower tomorrow. Markets typically rebound quickly from oversold levels. It’s taken four days for us to reclaim 2,000 support after a couple failed rebound attempts. That shows traders previously refused to embrace the bounces. Is the third time the charm? We will find out on Thursday.
While it is okay to buy the dip, keep the trade on a short leash and don’t allow these gains to retreat into losses. Failure to continue this momentum higher is very bearish and says we haven’t found the bottom yet.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.