Traders are breathing a sigh of relief as some of the ugliest small-cap charts have finally managed to bounce. It has felt like a bottomless pit recently as a host of stocks with solid fundamentals and valuations have been down-trending without regard for their individual merits.
I've made a few buys today and have been able to make some aggressive day trades, but I'm not trusting that the worst is over. At this point, this is just a routine oversold bounce, but one of the major shifts in this market in recent years is an inclination toward V-shaped bounces.
The conventional wisdom of technical analysis is that stocks don't just bottom and go straight back up. Technicians look for a retest of the lows or some sort of pause before an uptrend resumes. The theory is that trapped bulls that suffered through the painful pullback will be happy to sell when losses are not quite as big.
In recent years, retests of the lows have been the exception and not the rule. The most visible example is what happened last March. The S&P 500 hit a low on March 23, 2020, and never came close to retesting that low. It was a pure V-shaped move, and it drove a huge amount of FOMO (Fear of Missing Out) as it grew.
The current market environment is nothing like what we were experiencing back then, but there seems to be a much greater embrace these days of V-shaped moves. Maybe that is due to algorithms or some other change in market structure, but we have to keep the possibility in mind when we consider action like we have today.
Even if this bounce does fizzle, it does help to create a new support level at the lows hit this morning, and that gives us some technical levels to work with.
Trading action is back to normal today, but we need to maintain some healthy skepticism.