After a panic blow off such as last Wednesdays, there are typical signs to follow that suggest a bottom has occurred. Tuesday highlighted one of those typical patterns. The rally was broad-based (good breadth) and it was one of the largest gains in many months. Jason Goepfert of www.sentimentrader.com took a look at the instances where we’ve seen similar actions as of late. That is, when the market is above its 200 day MA but has recently made a 6 month low –followed by the largest one-day gain in at least a year. He found 10 such instances sine 1928:
“Like we see so often following quick drops-and-rebounds, there was usually some volatility in the short-term with inconsistent results. The choppy price behavior typically resolved itself with a resumption of the uptrend.
There were a few exceptions: 1929, 1937 and 1973. Assuming we’re not trapped in one of those instances, the S&P enjoyed a v-shaped bottom twice, in 1950 and 1965, where stocks took off to the upside and never looked back.
The other 5 occurrences exhibited what we would consider a normal testing phase. The initial kick-off phase ended about now with the large one-day gain. Stocks then spent 4-6 weeks chopping back and forth around the low set during the panic phase of the decline.
Should this continue to play out, risk should be rising in the short-term, with a better entry for investors in the coming weeks.”
If Mr. Goepfert is correct, we should see some chop over the next week or two. Yesterday was a good example of such volatility. That chop will provide opportunities. I’ll blog next week with some specific sectors to consider for trade. Meanwhile, I thought I’d start with a chart of the NASDAQ. It’s on trend, shows positive moneyflow and positive relative strength to the S&P 500. Momentum is hooking up, and individual sectors within the NASDAQ such as technology and discretionary stocks are entering their seasonal buy period. This is an area that we at ValueTrend are certainly beginning to dip into. You might want to consider doing the same. Keep some powder dry though, as more opportunities will present themselves if the market gyrates through a bottoming process.