bounce" is a phrase describing the temporary and sometimes violent
rally that occurs in an asset once it hits bottom. The farther the fall
– the larger the bounce.
However, no matter
how high the bounce, the dead cat will always fall back down and hit
the bottom again. And there are two ways to trade it… We can trade the
bounce, or we can trade the decline back to the bottom.
Stocks are primed for a dead
cat bounce. The S&P 500 is down 15% or so over the past month.
Investor sentiment, a contrary indicator, is overwhelmingly bearish.
The S&P 500 is 60 points below its 20-day exponential moving
average line (a distance of 30-50 points is extreme).
Tuesday's rally during the final hour of trading looked like it was the
start of a bounce. But yesterday's last-hour reversal dropped the cat
down a few more floors.
To be sure, it's tough to trade stocks from the long side right now.
Every rally attempt is hit with selling pressure, and the news flow is
decisively negative. Bullish traders need to be nimble and take profits
Nonetheless, there's a cat ready to hit the bottom. And when it
bounces, it's going to be a whopper of a rally. After all, we're
heading into the end of the month and it's a holiday weekend. Both of
these periods tend to be bullish for stocks.
Over the next several days, the S&P 500 could rally back up to
1,100 or even 1,130 if the bulls really take control.
Remember, though, dead cats always fall back to the bottom. Once we get
a bounce in stock prices, we're likely to come back down and retest the
As a trader, I'm playing stocks from the long side right now. But I'll
be quick to take profits and I'll be looking to short stocks
aggressively if the S&P rallies back toward 1,130.
Best regards and good trading,
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