Beware of a Failed Bounce

 | Nov 19, 2012 | 4:15 PM EST
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The indices did a very nice job of building on Friday's intraday reversal, but it was much easier to be a seller than a buyer. Many folks who jumped in on weakness last week were using the strength today to lock in good gains, but it was a challenge to put additional money to work. The major comments I heard today were complaints about filling too fast, particularly Apple (AAPL).

What made it even more challenging was that after the first hour of trading, there was very little movement. AAPL continued to run and breadth was extremely strong, but there weren't many gains if you weren't already in the market this morning.

Technically, a low-volume, oversold bounce like this should not be expected to last; however, these bounces have a tendency to last a longer than many think they should as fear of being left behind increases. The sort of action we are seeing today is typical of a bounce within a downtrend. It catches folks by surprise, and as they try to adjust, it provides an underlying bid and keeps the move going. Many market players fear being left out of rally more than anything, and they will pay up even if the entry points don't appear to be ideal.

The big question is whether the rally can continue to run. The market has recouped last week's losses, but it runs into more overhead resistance the further it bounces. The minute it cracks a bit, the rush to protect recent gains will start and the shorts will press, so the danger of a failed bounce builds.

This market has had a strong tendency toward V-shaped moves and almost all of them have started with a lower-volume bounces like this one. It is counterintuitive that a move like this should gain momentum, but it has happened often enough that we can't totally dismiss the idea. In fact, with the market ending at a high, there is likely to be plenty of performance anxiety and nervous shorts to keep things going. I don't intend to fight this strength, but that doesn't mean it's easy to add more longs.

Have a good evening. I'll see you tomorrow.

At the time of publication, Rev Shark was long AAPL, although positions may change at any time.

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