We have a battle this morning between a market that looks extremely ugly on a technical basis but is now very oversold and has extremely negative sentiment. From a contrarian standpoint conditions are good for a bounce but the problem is that this market has created a big supply of folks that are anxious to escape the recent pain.
Timing the market based on extreme sentiment is a very difficult task. The theory is that when 'everyone' is negative they have already acted on their desire to sell and therefore there is less selling pressure and that makes it easier for the market to bounce. The problem with the theory is that there really is no way to calculate the degree to which people have acted on their negative beliefs. The intensity of the desire to sell is going to fluctuate greatly and is really not knowable.
We do seem to have had enough negativity this morning to create a 'snap back' . The indices are still in the red but well off their early lows. The important thing now is that the intraday lows and the belief of some short term relief starts to build.
At this point in the market action there are going to be very few chart setups. What we have are stocks that are oversold and bouncing back. Momentum and trend followers will not like the charts at all but if you are playing bounces you have to look at things differently.
There are a few decent looking charts like my Stock of the Week, DryShips (DRYS) which has had very good relative strength and is at the same level it was at the end of September when the broader market fell apart.
If the indices hold I'll be looking for some index longs this afternoon but right now I want to see how much underlying interest there is. This market has not been able to hold on to even minor gains but once that starts to change we may manage a bit more upside.
Keep in mind that looking for a bounce is much different than looking for a change in trend. At this point there is nothing to suggest that the corrective action is over. However, the bounces that occur within downtrends tend to be big and fast. They will last long enough to pull in some new money but when they fizzle out it is very painful.