We had a classic low-volume, oversold bounce off of support today, which old-time technicians might think is a potentially good short setup. Prior to June 2009, that wasn't a bad bet. But in this market, the smart move has been to buy short setups rather than sell them.
Logically, this is not a market that should go straight back up, especially if the U.S. dollar doesn't collapse once again. We've had clear distribution lately and plenty of repair work needs to be done to individual charts. Market players are conditioned, however, to jump in on a bounce and keep on pushing. It has worked so often that it would be foolish to rule out.
If you began in this market sometime from 2009 forward the only thing you know is to buy these sort of dips, because there is never any pain for doing so. The only exception was in spring and early summer 2010 - when there was no major QE program* in place. That was a market that acted 'normally' (excluding May 6th) for 3-4 months from a technical basis. I enjoyed it.
*MBS runnoff was being reinvested i.e. QE1.5
But during QE campaigns it doesn't matter that volume drops off on rallies, and surges on selloffs. Doesn't matter if the leaders break down - they can now reverse 180 and go straight back up as if technicals no longer apply. All that matters is that after technical breakdowns, the cursory oversold bounce - which used to be a boon to bears to load up on short positions for the next leg down - have gone against pre 2009 precedent, and simply turned into V shaped moves.
So really the only question go forward is - has whatever changed since 2009 (grassy knoll types can offer many reasons on 'what' has changed) - permanently changed the market dynamic, or will we one day revert to what used to the work the previous X decades. I have no idea myself, and I now view everything with 2 sets of books - (i) pre 2009 and (ii) 2009 forward. Until I see the old rules matter again, I have to pretend I just started in the market in 2009 and play by set (ii). I will be interested to see if rulebook (i) comes back out July 1st, as it did spring 2010 between the two QEs....
Here is a trend line from the last two tops, and the current move - a break above that level would make me more comfortable joining the "this is easy!" bulls. You can also connect the 3 most recent lows from mid March and you see a big triangle forming. Whichever way you break out from that sort of triangle usually created a substantial move.