All week long, traders have been looking for a strong counter-trend bounce, and they finally found one on Friday. Following atrocious action on Monday, there were numerous short-lived attempts at a bounce, but they only created more pressure when they failed.
Sentiment was so dismal on Wednesday that there was a wave of liquidations as over 3,000 stocks hit new 12-month lows. Another failed bounce on Thursday pushed the S&P 500 to the brink of entering a technical bear market, but a late-day bounce was the setup for a gap and ran open on Friday. The rally faltered in the early afternoon, but the buyers regrouped and produced a finish near the highs.
A sizable counter-trend bounce after the aggressive selling and negative sentiment during the week is not a big surprise. But the big question we will confront next week is whether the bulls can build on this further.
Moves like this create hope that we had capitulation and a significant low, but it really will depend on the degree to which fear of missing out starts to develop. Trapped bulls that suffered tremendous pain recently will be happy to escape with some diminished losses, but there is always a bullish cabal that wants to proclaim that a low has occurred.
At this point, it is a bounce and not a bottom. A bounce of this sort needs confirmation in the form of a strong day of follow-through late next week. If the bulls can manage another thrust higher in a few days, then we can think in terms of a renewed uptrend.
The action Friday is a good start, but it requires much more work before it can be trusted. There remain many significant headwinds, the least of which is that bonds started to roll over again Friday as gas prices hit new record highs.
The good news is that we have a high level of volatility, and there are some interesting opportunities, but this bear market is far from over.
Have a good weekend. I'll see you on Monday.