The rebound attempt is dead; what to do next

Free After-Hours Analysis: 

The S&P 500 hit a rough patch Thursday, retreating nearly 1% and giving back a big chunk of this week’s gains. As bad as it felt, more importantly, the index remains above recent lows and 3,300 support.

At times, it felt like the market was in the middle of a spectacular collapse, especially when prices were down 1.5% and threatening to undercut recent lows. Fortunately, bears couldn’t deliver on those threats. I’m not saying they can’t finish the job tomorrow, but it is worth noting they couldn’t get it done today.

There were not any meaningful headlines driving this selling. Instead, this is simply a natural and periodic shift in sentiment. The market went up for a few months and now it is digesting those gains. Two-steps forward, one-step back. It doesn’t need to be any more complicated than that.

Today’s tumble kills the market’s second rebound attempt in as many weeks, but this isn’t a surprise. The probability of any individual bounce succeeding is relatively small. Sometimes the first bounce sticks. Other times it is the second, third, or fourth try that takes us higher.

If we knew which bounce was the real deal, this would be easy. Unfortunately, we only know what happens after it happens. In this case, the only thing we can conclusively say the first two bounces didn’t work. Will the third, fourth, or fifth attempt be any more successful? Only time will tell.

Up next is bounce number three. Will this one be the real deal? Maybe…maybe not. But statistically speaking, the third bounce tends to be the most successful. Just because the last two didn’t work doesn’t mean we should give up and quit. Unfortunately, that’s what a lot of dip buyers do. They get whipsawed a couple of times, become discouraged, and miss the real bounce.

As long as prices remain above 3,300, the market is grinding its way through the supply nervous sellers and the real bounce is just around the corner. Hold above 3,300 and I will continue giving this market the benefit of doubt. On the other hand, if prices crash under 3,300, all bets are off. But until then, I will keep looking for the next bounce. As I said, often the third time is the charm.

(It appears there was a glitch with my email delivery service and yesterday’s free analysis failed to send. If you missed it, check out: “What it looks like when I’m wrong“.)

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