For the past few years, every dip, no matter the size – has been a great opportunity to buy. They call it ‘buy the dip’, and when the pressure is high and price zips higher it tends to create V bottoms, where the chart looks like V, the drop looking catastrophic, creating the left side of the V, then a big turn higher when the buyers take price up sharply. The result is usually whiplash, but that has been the rule rather than the exception. So with the big rally on Wed/Thurs last week, is another V bottom in store? I’m not so sure this time.
I’m a follower of patterns and trends, and this V bottom phenomenon is quite the trend. Frankly, it’s been pretty reliable, so why would I be skeptical this time around? The SPX 500, which bounced more than 5% in two days, is now fairly overbought on several metrics, but is well below the 200 ma. This may indicate the bull trend is over (for now), institutions prefer buying above that long term moving average.
Further, volume levels on the rally back last week, while strong – were less than the selling. Breadth figures have been awful save for the rally days, where sellers just get out of the way and let price action move in one direction. While a move higher would not be surprising, I have my doubts this time around.
