Why even bears should expect a near-term bounce

Free After-Hours Analysis: 

The S&P 500 finished Monday’s session 0.2% in the red.

Unfortunately, the 0.6% midday gains didn’t stick into the close, but the modest loss was still comfortably above the opening lows that undercut 4,200 support.

This was one of those half-full/half-empty days that gave both sides something to crow about. Bulls saw a nice test of 4,200 support that held. Bears saw a skid into the close that keeps 4,200 support under pressure.

Which side will win? There are tons of opinions, but only time will tell.

I really liked the midday bounce because the violation of 4,200 support failed to trigger wider waves of defensive selling. We broke support, and most owners shrugged and kept holding. That tells us there is not much supply under current prices. If there were, it would have shown up as waves of selling early Monday morning.

On the other side of the argument, it takes a lot more than a lack of selling to prop up a struggling market.

I’m an optimist by nature because stocks spend far more time going up than down. In addition, everyone knows stocks move in waves, so it makes sense that after a bit of down, it is time to expect a bit of up. In fact, the biggest and fastest gains occur during bear markets.

Taken together, both of these things mean the odds of some near-term relief are actually working in our favor. In fact, even bears should be expecting a modest bounce near 4,200 support.

Of course, I’m not a buy-and-close-my-eyes kind of guy. I liked Monday’s early bounce, and I bought it. But as a new position, I started small and kept a nearby stop under Monday’s lows. If the rebound continues on Tuesday, I add more. If the selling resumes, I get out and wait for the next bounce.

As the saying goes, stocks climb a wall of worry, and by that measure, there are plenty of things to worry about. That’s good for stocks because things almost always turn out less bad than feared. Investors should fear the things no one is talking about, not the stuff that has been on the front pages for weeks, if not months.

I’m a buyer as long as 4,200 holds, but violate support, and I’m out of here.

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