The three-day counter-trend bounce came to an abrupt halt Friday as a flurry of late trading pushed the indices to the lows of the day. Lately, there have been a series of big moves in the final minutes of trading and Friday it was the bear's turn to jam the market lower.
The S&P 500 had what is known as an "inside day," which means that all the action occurred within the highs and lows of the prior day. It is highly unusual for a day in which the DJIA moved 400 points to be an inside day, but it illustrates how much volatility there is right now.
At this point the indices held the lows they hit on Thursday which is now key support. While support levels don't mean much in a bear market like this, it will be a level that will trigger trading action next week if it is tested.
At this juncture, we have classic bear market action. There is a waterfall decline followed by a big bounce that has many investors thinking that the worst may be over and then a reversal of the bounce. If this plays out in traditional style then the lows that were hit this past Monday will eventually be tested.
The optimists are hoping that the massive fiscal and monetary stimulus will backstop stocks and prevent that retest from occurring. The pessimists are concerned that the uncertainty of the coronavirus and its economic consequences will keep buyers on the sidelines.
Many times in the past several years I've summed up the week with a simple statement -- the trend is your friend. The trend may not be very friendly right now but it is warning us that the chances of more downside are very high. While we are seeing unprecedented government support, we are also experiencing an unprecedented event that will have ramifications for every single person in the world. It would be foolish to believe that this monumental event can be priced into the market very quickly or easily.
At some point there will be exceptional opportunities and they will be even better if we remain patient and wait for positive price action to develop. This extreme volatility is a good market for very short-term traders but if you looking to build longer-term positions it is still too early to put any substantial capital at risk.
Have a good weekend. Stay safe. I will see you on Monday.