Days like today bring out the real biases in many market players. Within the context of a sharp downtrend, we saw a fierce selloff last Friday and Monday, only to stage a late day rally yesterday. Today, we are solidly up 1% across the board. The steadfast bears are pounding the table, calling this a fool’s rally that will soon fall apart. On the other hand, the perma bulls are out in full force, declaring this the true bottom. Needless to say, there is a lot of emotion in the air.
What I find has worked best for me in these kinds of situations is to block out all of the noise, and look at the facts. We are still in a steep downtrend and have done lots of technical damage on most charts. However, we did become oversold, and as I noted a few days ago, a bounce was to be expected. To me, the crux of the issue is determining how sustainable the rally is.
I am looking for continued buying on strong volume, which should help to firm up damaged charts (on a daily time frame) across the board. That metamorphosis takes an awful lot of heavy lifting, and the institutions are the ones with the resources to do so. Moreover, the nature of a sustainable uptrend is that you will be able to spot good entry points, based on an occasional low volume, orderly pullback.
Of course, none of this could materialize, and we could easily roll back over and make new lows. So, although I am sacrificing the rewards that come with precisely timing an inflection point, I am negating the substantial risks that are associated with picking bottoms.Comments »