The S&P 500 bounced 0.34% Wednesday. While this would count as a respectable performance under most circumstances, unfortunately, these are not normal times.
Bouncing 0.3% on the heels of -4.3% bloodbath is downright pathetic. Stocks rebound from oversold levels hard and fast. And since Wednesday’s bounce was neither hard nor fast, that tells us the market is not oversold yet.
The optimist sees prices holding above 3,900 support. And without a doubt, Wednesday’s lack of follow-on selling brought some much-needed relief to warry stock owners. But Tuesday’s selling was emotionally charged and if there is one thing we know about emotional selloffs, they don’t bounce neatly off of support. Instead, they crash through support, send everyone scrambling for cover, and then bounce only after the crowd has given up hope.
Have we gotten to the point where all hope is lost? It definitely doesn’t feel like it.
Now, don’t get me wrong, I love buying the biggest down day of the entire decline because that often signals capitulation. The difference between those buyable crashes and Tuesday’s selloff is the latest tumble wasn’t plunging to fresh lows. Instead, we simply slipped back to levels from last week.
While a 4% bloodbath will get anyone’s attention, it doesn’t count as capitulatory selling until we are falling to levels no one thought was possible only a few days before. And since we were at these levels a few days ago, this doesn’t count.
No doubt Wednesday’s bounce could carry a little further on Thursday, but at this point, the wind is blowing in the other direction and momentum is clearly lower. Don’t relax because it is about to get worse. How much worse is anyone’s guess, but a terrifying violation of 3,900 support is clearly in the cards.
How much further we go under 3,900 is still up in the air and we will learn a lot more about the market’s mood when we get there. If supply dries up after violating widely followed support, then the bounce is near. If the panic selling resumes, hold on to your hats.
Of course, after this crashes through support and everyone else is panicking, that’s when we start looking for the next buyable bounce.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.