Was This the Bounce of a Dead Cat?

The market action is a good example of how the biggest bounces tend to occur in the worst markets.

These big bounces almost always follow some of the most dreadful action, but, unfortunately, they don’t always signal that the worst is over. We have had a series of moves of over 1% lately, and they tend to go in both directions as a correction plays out. The bounces help to relieve some of the pressure that has built up after relentless selling, but it takes more than a big bounce to form a market bottom.

This afternoon I reviewed hundreds of charts, and many of them look the same: There is increased volatility, sharp drops, broken support, and then a green bar on Monday. That is not a bullish formation. It might develop into a good chart eventually, but it is going to take more time and require more productive action.

Bounces like this are often given the name a dead-cat bounce, because they don’t come back to life and keep running. The cat is still dead. However, in recent years, there has been a much stronger tendency for “V”-shape bounces to develop. Rather than retest the lows, the buyers keep coming and drive stocks straight back up. That is not what most technicians expect, but given how often that has happened in recent years, we can’t totally rule that out.

The more traditional view is that a bounce like we have is a good starting point. There should be another round of selling and a retest of the lows. Eventually, a follow-through day will mark the bottom, but it’s a process.

The action Monday was a good potential start to a bottom for many stocks, but it is far too early to sound the all-clear. While it was a relief to see some good-sized gains, the context in which it occurred does produce much optimism. I’d like to sound more positive, but all that was accomplished Monday was that oversold readings were diminished.

Have a good evening. I’ll see you tomorrow.

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