After being slammed on Monday, the indexes have been steadily working their way higher. In overnight trading, futures even managed to fill the gap created on the chart on Monday morning, but the action has cooled off a little Thursday morning.
There are two primary reasons for the bounce. The first is that worries over the Evergrande crisis in China are dissipating. The market is starting to anticipate that the Chinese government will step in and assist in the necessary restructuring, but news is hitting as I write that Chinese officials are telling local governments to prepare for the eventual collapse of Evergrande. There also are worries that there may be other players in the property development sector that face issues.
The second reason for the bounce is that the market tends to embrace whatever the Fed might do. The Fed policy decision Wednesday was more hawkish than many expected, but the positive spin is that the market likes the fact that the Fed will not allow inflationary pressures to grow too much before it deals with them.
While the reasons for the bounce are obvious, the question for traders to contemplate is whether this will turn into another "V" bounce like so many recent recoveries have turned out. Probably the best example was the Covid bottom in March 2000. The market hit a low and then never turned back. There was no retest or consolidation. It was pretty much straight up after the low was hit on March 23.
The traditional theory in technical analysis is that the market tends to retest lows before a bottom is formed. The logic is that trapped longs will use strength to escape their recent miseries, and that will cause the first bounce to fail. In addition, aggressive shorts also look to press their positions into the first bounce.
For a variety of reasons, this logic seems to not work like it used to. It probably is due in large part to programs that are conditioned to buy dips and other structural reasons that have changed the nature of the market.
Is the current situation another setup for a V-shaped move? It is on track for that right now, but we still have negative seasonality to deal with, and we will see how will this gap-up open holds.
It has not paid to bet on retests of the lows for a very long time, and that is likely to be the situation once again. That doesn't mean we fly straight up, but be prepared for stocks to stay sticky to the upside.