Wednesday, May 19, 2010

Maybe A Bounce Is Coming?

Last week, the S&P 500's bounce attempt failed almost exactly at the 50-day simple moving average, around 1,175. This morning, the S&P 500 bounced almost exactly off its 200-day simple moving average, which is around 1,100. We didn't gain a whole lot of upside momentum after testing that level this morning, but it was enough of a test to attract a few buyers.

Unfortunately, the overall picture is muddled at best. We are oversold enough that you'd probably want to cover some shorts, but we aren't bouncing enough to make longs very attractive. As we have broken down and had one big failed bounce in the past week, you shouldn't expect to find a lot of attractive setups. If you want to position for a bounce, you have to be willing to buy things that don't have good upside momentum. At this point, momentum players are much more inclined to look for shorts on a bounce than to try to play a bounce.

It always comes down to a matter of style, but what we do know is that the market has undergone the worst correction since the big rally began back in March 2009. We are oversold and ripe for some sort of relief rally, but we are not seeing any signs of the V-shaped bounces that saved the bulls numerous times during our big rally.

The big decision for market players is whether to look for an oversold bounce that fails and a test of 1,075 or lower, or to look for the dip buyers to come to life again and the market to pull off another strong recovery. The chart setups suggest the former, while optimistic bulls are sure to embrace the latter.

Stay flexible and open minded. The good thing about this market is that we have needed a good shake-up for quite some time. We have one now, and it's our job to find some new ways to profit.

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