Monday, October 13, 2008

A big bounce after a massive breakdown like we had today is very tricky to navigate. The reasons that these "V"-shaped moves should pull back fairly fast are obvious. Short-term traders who caught the low will be taking their profits, and longer-term investors who were sweating over their losses will take the opportunity to escape with a little less pain. That is what overhead resistance is all about.

The tricky thing is that there is no easy way to gauge how far a bounce will go. They often have a way of going further than most people think, and that triggers performance anxiety and panic buying, which drives them even further.

Technically, a big one-day spike following a massive breakdown is not a particularly good entry point. Technicians don't tend to trust "V"-shaped bounces to continue, and when they do, it causes a lot of anxiety as folks stand on the sidelines waiting for an entry point.

The bounce is on, and how far it goes nobody knows. In the bigger scheme of things, we are just back to some levels we saw last week, so it's hard to be too trusting that it's straight up from here, given all the overhead. The intraday action was a real buying frenzy, but if you look at the chart of the last six months, it's just a good-sized blip.

The good news is that we have finally stopped going down, and that is the first step in giving us a market where we can find some buys once again. The move today was a bit overheated, but at least we now know that not everyone went broke and is expecting a depression. There are some real buyers out there, and hopefully they will be supportive in the days and weeks ahead.

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