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  1. Home
  2. / Investing
  3. / Stocks

Bounce Action Is Developing, but Don't Trust It to Last for Long

It is best to adopt a very short-term time frame rather than fixate on proclamations about a market bottom.
By JAMES "REV SHARK" DEPORRE
May 13, 2022 | 07:37 AM EDT

After the strongest close for the indexes since May 4, there is some upside follow-through on Friday morning. Traders have been trying too hard recently to catch an oversold bounce, but after one failure on Thursday, a rally in the last hour of trading helped to produce some momentum that is holding up this morning.

Over the past week there have been numerous bounce tries, but none of them has lasted longer than a few hours. That has helped to create a large number of trapped bulls who want to escape and an inclination for short-term traders to quickly sell into strength.

The biggest bounces tend to occur in the worst markets, and there is little question that this is an extremely poor market. For these bounces to gain some traction they need to hold up long enough to cause some traders to think that a bottom is forming and that they will be left out if they don't do a little chasing. This sort of action will feed on itself, and that is how we end up with big counter-trend moves.

Watch for comments about how the liquidation that hit hard on Wednesday was a sentiment extreme that produced capitulation and has produced a tradable bottom.

While navigating this action, it is very important to keep in mind that this extremely poor action has created a large number of investors who would like to reduce their exposure if they can do so into some strength. That overhead resistance will be extremely strong, but short covering and momentum chasing are what tend to cause the big counter-trend moves.

I don't play the bottom calling game, and I'm not going to speculate about whether this may turn into a significantly low or not, but the fact that the S&P 500 tested the bear market threshold with a drop just shy of 20% from the highs does not give me much confidence that support will hold. When a support level is that obvious, it typically must be breached before a better low can form.

Stay very vigilant as this bounce try develops. If we start to fill the morning gap, it is going to trigger some very fast selling.

This is typically bear market action right now with increased volatility and the potential for big swings. It is best to adopt a very short-term time frame rather than fixate on proclamations about a market bottom.

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TAGS: Stocks | Real Money | Investing

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