Wednesday, January 09, 2008

Dead Cat Bounce


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The market behaved in an interestingly familiar fashion today.

Guess where I have seen this before? It's almost like deja vu.

There were many traders who proclaimed the swing bottom today. Good for them, I wish I was around to witness it. But the burning question that is really wetting my noodle is this: is this THE true market bottom from which hope springs eternal and from which a new bully rally takes us to new highs?
Well, before we book tickets for that bandwagon, take a look at this chart:

The red circles that I've highlighted in the above chart indicates where RSI(3) was very oversold (<10), and thus the setup was there for an initial bounce back up. However, any rally attempt from there would fail, and the true bottom would occur a few days or even weeks later. The one pattern that I get from the above chart is this:
Market bounces, the bounce runs out of steam after a few days, and the market drops back down to test the pre-bottom level (and often dropping below the pre-bottom level) and then puts in a more reliable bottom from which it can move back up to repair the technical damage. Here another example of a bottom being carved out.

Now, I don't have a clue whether that is the process we are going to see unfold. But I do know that today was not THE bottom. Chances are that it is more of a dead cat bounce. The logical place of resistance for this dead cat bounce is 144 on SPY.

Not sure whether I will initiate any trades tomorrow, as I would like to take a look at the market action to assess the size and strength of this dead cat bounce. It would also depend on what I find tonight and what sectors will perform the best in the next few days.

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