End of Day Update:
This was a day traders won’t soon forget. Contagious overseas selling dragged the S&P500 down nearly 1.5% before lunchtime. By itself this was a striking move, but the day was only half over and the second act was even more impressive as we rebounded to close in the green! We’ve grown accustomed to daily moves that measure a quarter of percent in this dull and slow market. We haven’t even moved outside a 5% range all year-long, but somehow we managed to slide across 3% in one day! Amazing.
Unfortunately for many traders this wasn’t the good kind of amazing because it convinced them to trade reactively, a.k.a. sell-low and buy-high. And honestly I cannot fault anyone who was fooled by these dramatic moves. Sometimes the market gets the better of us and this was easily one of those days.
After this move made both bulls and bears look foolish, we are left wondering what comes next. Clearly the selling could have spiraled out of control because nothing shatters confidence like screens filled with red. But supply dried up near 2,050 support and we bounced. This rewarded those that held the dip and Pavlov would tell us they are even less likely to sell the next one. This was yet another example of a market that simply refuses to breakdown. While the obvious interpretation of today’s bullish reversal is, well bullish, nothing in the market is ever that clear-cut.
A breakout above all-time highs is extremely likely given this market’s refusal to breakdown, but emotion is sky-high and chances are this will be anything but a smooth ride. While confident owners are keeping supply tight, it will take a bit of time before recent sellers warm back up to this market. Whether is it lingering fear, or a refusal to admit making a mistake, many of these sellers will stay in cash until prices climb so high they stop fearing a correction and start fearing being left behind. Often we see prices snap back aggressively from extreme oversold levels, but it is hard to claim a 2.5% dip from all-time highs qualifies as extremely oversold. Today’s rebound tells us the path of least resistance is higher, but it will probably continue to be a bumpy ride.
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