Market downtrends largely are comprised of failed bounces. Market players constantly are looking for an escape from the misery and are inclined to reduce positions when they can. The bounces are usually vigorous enough to convince quite a few folks that the worst is over, but that just sets up a trap and makes the reversal even more painful.
We had a good example of a failed bounce after the big move up on Oct. 16. That bounce was wiped out over the next four days. Some market players thought it likely that a second bounce attempt so soon after the first bounce attempt might have a better chance of holding, but they were wrong in this case.
The big problem is that the reaction to the earnings reports after Thursday's close from Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOGL) was so poor. The reports themselves weren't that terrible, but market dynamics favored a "sell the news" reaction. It may have been a different story if both stocks had not bounced back so sharply on Thursday, but that raised expectations for the reports and helped to produce the poor response.
In the early going the SPDR S&P 500 ETF (SPY) and Nasdaq 100 (QQQ) have completely reversed Thursday's gains and stand to make new recent lows under the Wednesday lows. That may not be a bad thing. It is the sort of negativity that produces capitulatory action. Market players are obviously disgusted and are willing to dump stocks into the abyss.
We will see if dip buyers are brave enough to step up into this ugly open. I suspect they will be looking for entry but may hesitate a bit like they did on Tuesday, when an opening gap down was nearly reversed with a steady uptrend most of the day.
The most important thing to keep in mind is that this is a market driven by indices and not by stock picking. While Amazon and Alphabet are the obviously catalysts, much of the selling manifests itself in ETFs. People hold those stocks through ETFs such as the QQQ, so when the QQQ is sold all 100 stocks in the Nasdaq 100 also are sold. There is no attempt by the ETFs to differentiate between "good" stocks and "bad" stocks.
The ETFs always are going to drive the action and cause stocks to move in correlated fashion. However, when the market action improves we will see more stock picking occur. All of the action recently has been driven by the indices and it really hasn't mattered which individual stocks you held.
One of the first signs that the market is hitting a low will be improved stock picking. The value buyers will emerge and start looking for the names that are the best bargains and they will start showing some relative strength. This is when the big opportunities will start to appear and the astute stock picker will benefit.
I'm looking for this poor open to attract dip buyers. The earnings reports form Amazon and Alphabet are not that bad and it will be hard for some buyers to resist this poor open. They still are conditioned to buy weakness like this and are likely to give it another try given the magnitude of the reversal.
Play the bounces if you are so inclined, but don't start trying to predict a bottom in the market. There is no reason to believe at this point that the trend is going to turn up.