When a market declines fast and then bounces back with equal to better vigor it shows strength, but if it bounces in a weak manner it identifies a probable bad outcome.
When a market drops, a bounce is almost always likely because value players use it as an opportunity to get into the market at a lower price, also people that missed out on the first rally are usually wanting to buy a lower prices … so the bounce is imminent, but the strength of the bounce is very important to watch.
If there are lots of buyers, then the volume and price will show solid strength during this rally attempt, but lack of buyers and you get a rally attempt that fails quickly as the buying dries up. If you think about it … if I have $10,000,000 and want to put that to work in the market … it might push the market higher for a few hours, but if a few billion comes into the market … the buying will last longer and quite possibly will absorb all the selling that is occurring and move the market to new highs.
It is simple supply and demand … and watching how the supply (people selling) is being absorbed by the demand (people buying) is very telling.
Today’s strong decline was definitely not positive action for the market and Friday’s one day rally definitely was not very convincing. As the demand dried up (no more buyers), the selling took over and we saw a dramatic reversal.
A healthy rally should last for many days, which obviously did not occur.
We need a strong counter-attack by the buyers today in order to get the market back on track, otherwise I expect continued selling into the weeks’ end.
Check out our original post from last week here … resnn-moves-fully-to-cash