Can We Expect A Fourth Bounce In The Market Tomorrow?

To sum up the market as of late, five straight weeks of losses and another day of all major sectors closing in the red. My portfolio strategy during these times is a very simple concept/rule, but sometimes hard to obey. Honor stop losses, hold as much cash as possible, keep the long-term section of my portfolio minimal since we do not know how far prices will continue to fall, and stick to mostly day trades without holding overnight. Markets, as such, are prone to gap-downs to open the day and can fall very quickly, so holding overnight is not usually the most wise risk to take unless you have some type of edge in knowing which way the market will work the next day. Tomorrow may be one of those days we have somewhat of an “edge.”

One trend is that we are currently at the bottom of a trading range in the small-cap iShares Russell 2000 Index (IWM). Over the past few weeks, we have hit this bottom of the trading range three times and bounced, giving it more reliability. Are the bulls so bruised and battered that they are still afraid to mount any serious offense though? If they can’t, we might not find much support until all the way to the 200-day SMA.

Today marks the fourth time we have touched the bottom of the range, bouncing all three previous times. If history has anything to say about it, we should bounce from here towards the top of the trading range, but not necessarily to the top (see annotated chart). The bulls desperately need a win. Overall, I feel we will continue this downtrend until we reach somewhere near the 200-day SMA in the indices, possibly even lower, but I still feel this downtrending trading range will stay intact until we reach it. This is more reason we want to stay in cash and wait for better long opportunities to present itself when the bulls finally resume buying. As of right now, the bulls are nearly nowhere to be found, so don’t try to be a hero as it will likely turn more into a suicide mission for your portfolio. If we bounce, stick to disciplined trades and don’t overextend yourself. We’ll have much better days ahead, right now is very risky to have too much long exposure.

IWM Chart