Should we trust this bounce?

In the past two days the S&P 500 has fallen below some key support levels, only to come back and close the day back above them.  The positive "outside day" pattern (where the day's high was higher than the prior day's high, and the day's low was lower than the prior day's low) was impressive in that again, we closed on the higher end.


                                       Chart provided courtesy of www.decisionpoint.com

On the other hand, small caps didn't participate and more stocks were down on the NYSE.

I am seeing a lot of uncertainty across the board from both amateurs and professionals alike.  We are seeing some strange mixed signals and it is making the short term a very tough call.

I see 1285 as a good test for the S&P.  Currently sitting at 1278, if a move above 1285 holds it will be a bullish sign for the short term.  If you are not sure whether to trust this rally, you may want to wait to see how the S&P handles 1285.

The other day I had mentioned that we have not had a 10% or more pullback in three years, and that has only happened three other times in history.  Those three instances preceded a 27%, 20% and 7% drop.  Not very good odds.

On Tuesday the Dow closed in positive territory despite 3-to-1 negative breadth on the NYSE (3 stocks down for every one up) for only the third time in the past 60 years.  The previous two times the S&P 500 lost 13% and 9% over the next month or so.  Hmmm.

Sounds bad, but we are seeing equally positive signs from some of the short term oversold indicators and sentiment indicators.


                                       Chart provided courtesy of www.decisionpoint.com

We are finally seeing the some deeper oversold conditions but as you can see above it can get worse, and hopefully it does.  The more we sell off and become oversold, the more likely we will get that elusive long term buy signal.

The I fund took a bit of a harder hit yesterday than appeared warranted.  That has usually meant a better showing the next day.  We'll see.

The G fund seems like the safe place to be in this uncertain period.  Or is it?  You may want to check this out. 

That’s all for today.  Currently 100% G fund.  Thanks for reading.  See you tomorrow.
 

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