Many traders have been trying hard to catch an oversold bounce, but the only thing that those attempts have accomplished is to create more trapped longs. As the bounce try failed on Wednesday, the market moved to a new phase of the bear market: liquidation.
Liquidation is when market participants want out regardless of the price. They have given up on believing that fundamentals or valuation will protect them and simply want to protect the capital they have left and sit on the sidelines.
The liquidation was most obvious yesterday in big-cap technology names. Apple AAPL, which has been a safe haven for a very long time, dropped 5% and took out some key support levels. It still has not corrected as much as many high price-to-earnings growth names, but it is on the brink of hitting a 20% drop, which is the technical definition of a bear market.
It is often said that oversold can become even more oversold, and that is what is happening now. Although sentiment and price action are becoming very extreme, the market can't produce a good bounce because there are so many trapped longs who want to use any strength to escape the pain. There aren't any long-term buyers at this juncture to build support. There are just short-term traders trying to catch a counter-trend move that they don't believe will last.
What will it take to bring this market to a low? At this point, it is futile to guess. The best course of action is to simply wait and see how things develop.
One of the biggest challenges of this sort of market action is staying patient rather than trying to time the exact moment that the market hits bottom. It is understandable that traders want to perfectly catch a huge counter-trend move, but they can rack up some substantial losses while trying to do so.
I'm going to continue to repeat my best advice for this market -- wait for better price action and don't try to predict a bottom. Keep your capital safe and stay patient. When the market finally produces a meaningful turn, it will last days or weeks, not minutes or hours.
We have a soft open on the way as liquidation action continues.
