Is The Rebound Real?
7.527 billion shares traded across all USA markets. It was the highest volume day on record as far back as I could research tonight. At one time this morning the declining volume was 15:1 over advancing volume. I have never seen it that high in recent memory. That improved to 2:1 declining over advancing by days end.
By anybody's metric this was a capitulation day. Unfortunately that does not make it the end of the selling. The Dow rebounded from a -177 intraday low to close positive by +7 points and produced a 207 point range for the entire day. The S&P penetrated the key 1240 level to touch 1235 before rebounding +22 points to close at 1257. The Nasdaq did not make it back to positive territory but did rebound +44 points after falling to key support at 2100.
For all practical purposes this was a textbook capitulation day but it was far from convincing. The rebound was lethargic and was peppered with bouts of weakness. The A/D line was well off its 1:5 adv/dcl lows but could not quite make it to 3:5 by the close. For real confirmation of a capitulation event that produces a market turning point there should be a rush to buy with a strong surge of buying volume. We had strong volume but institutions were selling into it all the way up. On a capitulation rebound the bullishness should carry over into the overnight futures. The S&P is up +1.50 but the small cap Russell is down -1.50 and -2.20 off its early session highs.
Oil was hammered to a low of $69.05 intraday on the Al-Zarqawi news. Some thought with him out of the way Iraq would be free of the constant sabotage to pipelines and be able to pump more oil. Al-Qaeda was quick to squelch that idea saying they would uphold the memory of Al-Zarqawi's martyrdom by stepping up attacks in Iraq. Oil quickly rebounded to close at $70.50 and is holding that level overnight.
Oil stocks were crushed at the open but many came screaming back when bargain hunters began buying the dip. However, of the 100 or so I watch constantly only 29 made it back to positive territory. Not a very decisive performance for a sector that has been decimated.
All of these factors lead me to believe that we are not out of the woods yet. I bought the dip and I am still long overnight but I am beginning to get that sick feeling in the pit of my stomach that trouble is still brewing. Asia opened positive and is trying to staunch the bleeding we have seen over the last week. Still our futures are weak.
I feel good about our position adjustments we made today and will recap them all this weekend. I don't feel good about the market close. I would love to be proven wrong and have a continuation day on Friday but I am not going to sleep well tonight with this nagging doubt weighing on me.
I would suggest tight stops on Friday and be prepared to exit your short term trades at the first sign of trouble. There is a thread of trader chatter tonight about the possibility of another dip at Friday's open to clear out the rest of the margin holders. Today's rebound gave them hope but a return of weakness tomorrow should send them packing. That would give us one more buying opportunity before a potential rebound with legs next week.
Bottom line: Tighten your stops on those rebound trades and be prepared to exit and then buy them back on the next dip.