The biggest bounces tend to occur in poor markets. Market players are not positioned for these moves so when strength suddenly appears they are forced to cover shorts and scramble for long exposure. That helps to accelerate the bounce but it also always creates the fuel for the next drop when these newly minted buyers are stuck in an upward move that suddenly loses steam.
The action over the past week was a good example of this phenomena. The post-election bounce on Wednesday caught many market players by surprise. There really was no logical or fundamental basis for it other than the empty platitudes used in the headlines that the market liked the idea of political "gridlock."
That move then created a technical "follow through" day and helped to provide a basis for the argument that the worst was over. The reaction to the Fed last Thursday caused some doubts about the rally and then the rollover commenced on Friday and picked up steam on Monday.
That takes us to Tuesday morning where there is a slight relief bounce brewing on news that China's top trade negotiator is coming to Washington, D.C. to meet with Treasury Secretary Steve Mnuchin.
We have heard a number of stories like that recently and they have not had a lasting impact on the market. The impact fizzles out quickly as the complicity of the daunting task takes hold again.
The market's biggest problem right now is that the bearish narrative has taken hold and the price action has been unable to overcome the nattering nabobs of negativity. The positive technical conditions were negated with three down days after the jump last Wednesday.
It will be particularly instructive to see how willing market players are to chase a bounce this morning. The problem with bounces like this is that tend to be viewed as a means of escape and that overhead resistance can be very hard to cut through. This market has been brutal lately and many market players will be happy to escape the misery with reduced losses.
There is a lot of noise from the pundits and their critics right now. The bears that have been wrong about the market are gleefully attacking the perma-bulls that dominate the media but that is of no value to individual investors trying to navigate this market. Stay focused on price action, understand the negative narrative that is in play and look to react as conditions evolve.
While this market is in poor shape right now and bounces raise hopes, they should not be trusted. This is a good time to be a trader rather than an investor. Stock-picking right now is very poor with limited setups so a very high level of selectivity is required.
My game plan is to ignore the market pundits, focus on price action and try to pick off a few trades as things develop. The broad market is technically ill and that will take some time to repair.