Wednesday, November 14, 2012

Bounce Time? Maybe, But Don't Be So Sure

After another awful performance today, most traders are asking a simple question - "Are we ready to bounce?".   Unfortunately, it's not an easy question to answer with certainty.  Today's selling took us to somewhat extreme levels on the two major overbought/oversold indicators I follow but we are not yet even at the most extreme levels of 2012. 

From a technical viewpoint, all of the indices continue to get pounded with heavy volume distribution and even the slightest attempt at a bounce intraday has been met almost immediately with selling.  Today was a prime example, with the Nasdaq starting the day with a seventeen point gap up which was sold almost instantly.  An almost sixty point selloff from high to low is not what you see in a market that wants to put in a bottom.   The small caps got hit even worse and really look bad.

Russell 2000

The McClellan Oscillator (T2106 in Worden) is certainly at oversold levels but has been lower three other times this year, so a bounce is not a given.  No doubt it's possible, but don't expect that much.  If you go back to May, the bounce lasted no more than a week before more selling came in and new lows were made soon after.

An oversold indicator that I created and follow that compares the number of stocks above and below certain RSI (2) levels is also in an oversold area, but this was also more extreme in May.  

I also find the VIX interesting here.  The Nasdaq is off about 180 points over the last six sessions and the VIX has actually fell over that time.  To my semi-trained eye, this would suggest a lack of fear in this market, which given the selling we have seen recently is not exactly a good thing. 

VIX - Complacency anyone?
All Charts from TC2000, Courtesy of Worden Brothers, Inc.

I made a little cash this week with some quick day-trades here and there (having Monday off work helped in that regard) but my main game plan of remaining in cash has held true.  Protecting capital is goal number one when the market is in "sell everything" mode and that's what I will continue to do.   If we see further heavy selling tomorrow, we may reach the point where a sharp reflex bounce is a good possibility, but it will be a long time in my opinion before stocks are buyable again for anything more than a one or two day trade.   There has been tons of damage done to individual charts over the past few weeks and leaders are hard to find. 

Bottom line - it is right to expect a reflex bounce soon but don't be surprised if it comes from much lower levels.  Any trades I make over the next few days (weeks actually) will be short-term and nature and with very tight stop loss levels.   Good luck. 

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