What Kind Of Bounce Will It Be?

  • March 24, 2005
  • Rob Hanna

The
market did a little head jiggling Wednesday, but ultimately went
nowhere.  It remains “due” for a bounce.  (Anyone sick of hearing that yet?) 
Trading conditions are extremely challenging.  If you’re focusing on the long
side — good luck.  If you’re focusing on the short side, you may want to wait
for SOME kind of bounce before shorting aggressively.

One astute reader mentioned to
me that he thought the current environment reminded him of the rally we saw in
November — but in reverse.  He recalled what I’d written about the trend at that
time.  This is from my November 15th article:

“In strongly trending
markets, pullbacks can sometimes be very brief.  It is not usual that you will
see a nice looking 4-day pullback on declining volume that is halted right at an
obvious support level.  Very strong markets (both up and down) many times will
offer little opportunity for entry.”

To expand on this, I expect one
of two kinds of bounces when it actually comes.

1)     
Shallow — A shallow bounce won’t give
many people the opportunity to jump on the downtrend before it continues.

2)     
Sharp — A sharp bounce will shake out
many of the people that are already short, before the downtrend resumes.

In markets such as this where
you are afraid of a short-covering rally wiping out any new short positions, it
can sometimes make sense to start with a smaller position, and scale in further
between your entry price and your stop if the position initially goes against
you.  This can help to lessen your risk, and may allow you to enter at a better
average price.

Below is a chart of the S&P 500
going back far enough that you can compare the March downtrend to the November
uptrend.  While this move isn’t nearly as steep, you’ll notice that it is just
as steady.

 

Best of luck with your trading,

Rob


robhanna@comcast.net

P.S Get my Hanna ETF Money
Flow System

here.

 

 

 

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