Get Ready for the Bounce

End of Day Update:

The S&P500 ended a turbulent day exactly where it started. But given the headlines and early losses, a flat close is actually a win. Japanese stocks were gutted 6%, oil plunged 5%, and Europe was down nearly 2%. In the face of these tremendous headwinds, our market held up amazingly well by not succumbing to the global panic. Unfortunately flat might not be good enough.

Typically oversold markets rebound with explosive force. While that bounce might arrive Wednesday, if it doesn’t, that means we have a little more downside remaining. Two-weeks ago I suggested we are on the verge of entering an 1,800ish-1,950ish trading range and so far that is exactly what has happened. We rebounded off the January lows when we ran out of fearful sellers and existing owners were no longer willing to discount their stocks any further. That put a floor under the market and helped stocks rebound to 1,940, but beyond that point those with cash were no longer willing to chase prices higher in the face of this looming uncertainty. The resulting lack of demand pushed us back to the lower end of the trading range. At least to this point, stock owners are once again showing a reluctance to sell at lower prices and is why we found support the last two days. This confidence is keeping a lid on supply and propping up prices. No matter what the global headlines say, when few are willing to sell, prices remain resilient.

While it is easy to say this is little more than a normal and routine trading range, it sure doesn’t that way. But the thing to remember is nothing ever feels routine in the market. By rule every move has to be dramatic. If it didn’t, no one would sell. And when no one sells, we don’t go down. Therefore every time we go down, it must feel real. This is circular logic, but it happens every, single, time. The only time a market looks easy is when we are reviewing a chart months after the fact. And to this point, I have little doubt that two-months from now it will seem painfully obvious what we should do. But without the benefit of hindsight, making a trading decision today is anything but easy.

If we don’t bounce Wednesday, that tells us we haven’t found the capitulation bottom. As I stated earlier, rebounds from oversold levels are decisive and meandering around this level for three-days is anything but decisive. The ideal capitulation bottom is a relentless intraday selloff that slices through January’s lows and breaches 1,800. But just when it looks like we are going over the waterfall, we run out of sellers and bounce. That will be our buy signal to buy and hold a return to the upper end of this trading range. But in this instance it is better to be a little late than a lot early. Wait for the bounce to ensure we are not in fact plunging off a gigantic waterfall.

Jani

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