We have a good-sized oversold bounce Thursday morning as the combination of panic-selling into the close Wednesday night and some good earnings from Microsoft (MSFT) and Twitter (TWTR) are bringing in traders.
In the past many market players were quite pleased when an oversold bounce turned into a V-shaped move back to recent highs. That is unlikely to occur this time.
Oversold bounces within a correcting market typically are strong enough to convince many people that the worst is over but that is the trap that ultimately makes downtrends so painful. A good example of this was on Oct. 16 when there was a very sizable bounce that totally reversed and helped to create Wednesday's extremely painful action.
The key to trading an oversold bounce is to treat it like a short-term trade. Don't start believing that it is clear sailing to the upside from here. Even if the recent lows don't hold the likelihood is that it will be a bumpy ride.
Too many people have been burned by this market recently and will be happy to escape with some reduced losses. If you have positions that you are looking to exit this is the sort of action to use to do it. Set a stop and let the position go with no regrets if it hits. You can always rebuy.
Right now, the action is still macro driven rather than stock driven. The market is moving mostly in corelated fashion and isn't distinguishing much between good stocks and bad stocks. As emotions cool off we will start to see a shift back to stock-picking and that is when astute traders can be much more aggressive again.
We have big reports Thursday night from Amazon (AMZN) , Alphabet (GOOGL) and Intel (INTC) . After the positive report and response to Microsoft that should keep a bid under the FAANG names into those reports.
Amazon is going to be particularly important as an indicator of sentiment. The stock has corrected more than 10% from recent highs but found support Wednesday at its 200-day simple moving average. Expectations have come down but it still needs a solid beat to generate momentum.
If Amazon has a "sell the news" reaction to its earnings that is going to bode very poorly for the broad market. Amazon has a history of disappointing shorts but market conditions have shifted and there isn't much appetitive left for chasing the big-cap technology names right now.
I will be looking to add some new names as the day progresses. President Trump is scheduled to give a speech at 2 p.m. ET on drug pricing and I will be watching the biotechnology sector for a reaction. That sector has been pummeled and has some of the best potential for bigger bounces. One speculative biotechnology name I'm adding today is ENDRA Life Sciences (NDRA) .