On Monday, the Nasdaq plunged 4.9% in a frenzy of fear and worry, but bargain hunters decided that the action was overdone and jumped into the teeth of the intense selling. The bounce brought in more buyers that had been looking for a dip-buying opportunity, and by the end of the day, the Nasdaq had fully recovered its losses and added a gain of 0.6%.
Although breadth was still negative and the gain in the indexes was mild, an intraday reversal such as this is bullish. However, moves like this require some sort of confirmation to prove that they are real and not just short-lived volatility triggered by excess emotion.
What the market needs now is upside follow-through. Buyers need to step up again fairly soon and show that they have gained confidence in the market. A good follow-through day may not occur for a few days, but it is now important that the lows that were hit on Monday not be breached.
Another issue to watch is sector flow. The dilemma of this market is that while the indexes and some big-caps are oversold, there are many growth stocks and other groups that are really oversold. This disparity in the market between stocks already deep into bear markets and those that have only corrected 10% or so is a major challenge.
There is plenty of news flow on deck to provide justifications for the next market move. Microsoft (MSFT) and Intel (INTC) report tonight, and Tesla (TSLA) and Apple (AAPL) are coming up in a few days.
On top of earnings, the Fed announces its latest policy decision on Wednesday. It is widely anticipated that it will set the stage for upcoming rate hikes, but market players will be looking for some shift in the hawkish tone.
The reversal on Monday was a favorable sign, and it created a huge number of potential bottoms in various stocks that have been at lows. More than 2,300 stocks hit new 12-month lows on Monday, but many finished with what is known as hammer patterns, which can signal a bottom. The key, however, is some follow-through to the upside.
We have a soft start Tuesday morning as market distrust remains high, but some choppy consolidation would not be a negative at this point.
