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Has The Strong Bounce Worked Off The Upside Edge?

After being strongly oversold the market has bounced back quite nicely the last 1½  days.  The effect has basically been to work off the oversold condition and leave several indices just a little above their 10-day moving averages.  In other words, it has been a quick trip from near-panic to fairly neutral.  Had the reversal not been so strong then the current upside potential would be a little better.  But since the move was so good (and I’m not complaining), it took out much of the upside edge.  I demonstrated this in last night’s subscriber letter.

There I looked at patterns similar to the current one where SPY made a 10-day intraday low on day 1 and then posted an unfilled gap up along with a close above the open (and above the 200ma) the next day, as it did on Friday.  I broke it down by instances that closed above the 10ma versus instances that closed below it.

 

So the current situation falls into the 2nd category.  Wins & losses are basically breakeven but the losses were a bit bigger.  I don’t view this as a bearish edge, but I think it demonstrates my point fairly well.  Had we not bounced so much, we would have a better chance of seeing more follow-though.  As is, it appears some caution and perhaps some profit-taking is warranted.

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