A Possible Trading Bounce? But to Where?

In these times of uncertainty, the most important thing for me to do is to take responsibility and accountability for my own actions. There is no point in blaming external factors. I have no control over those, and it is a waste of time to bemoan them.

One of the best trading related books I have read is “Trading in the Zone” by Mark Douglas and the above is one of the key learnings from that. It is all about ones own discipline and behavior no matter what the market conditions are.

Regarding the tariffs, the only thing I will say is that I have no control over it. I can complain all I want but there is simply nothing I can do to influence that. And there are likely arguments on both sides how good or bad it is for us. But, for trading, it does not matter. What matters is how I react.

And yes, I am not going to discuss broader impacts such as recession, stagflation, etc. simply because I have no idea. The only thing I can do is stick with my discipline and play the hand I am dealt.

OK, so what am I going to do? Or what am I doing? First let us look at the facts before us.

On Friday morning before market open, I posted the following on X:

The intraday low on Friday was 5069.9 and the close was at 5074.08. Here is how the chart looks now.

When I said the downside target to be 5068, I did not expect price to go down there immediately in 1 day. But that is what price did.

Clearly, the market is oversold. How oversold is it? The RSI on the SPY daily chart is at around 23. The only time it has been lower than this in the last 10 years was during COVID. And the SPY is oversold also in the weekly chart. Again, that has not happened other than during the COVID drawdown.

As you know I track the major market indices trending and also the trending of the underlying stocks of these indices at a high level. I have only been tracking from Nov 2024 so do not the statistical relevance that these are the lowest percentages I have seen for how many of the underlying are over their 20-dayu moving average.

For the SPY (S&P 500) only 29 stocks have their price over their 20-day moving average.

For the QQQ (NASDAQ 100) that is only 4.

And for the IWM (Russell 2000 small caps) that is 108 out of 2000 stocks.

There is an excellent macro zoomed out note that Subu Trade writes every week. This week’s note is especially important to read as it talks about the oversold conditions from a statistical perspective. I consider these notes a must read for me.

Nothing is ever certain in the stock market. But given the level of oversold conditions, there should be a bounce coming soon. Perhaps as early as Monday. But I consider that only a tradable bounce. And I will be very surprised if we get a V-shaped recovery from here.

So, assuming there is a bounce from here or somewhere close to here, what could be the levels above to watch so I can trade this bounce? I think it makes sense to look at the Fib levels.

In the SPY daily chart below, I draw the fib levels from the recent high (the attempt to bounce) touched on 3/26 down to the low of Friday.

The 23.6 fib retracement is at 521.88 which is +3.29% from current levels.

The 38.2 fib retracement is at 532.29 which is +5.35% from current levels. Note that this will not even close the gap from Friday.

The 50-fib retracement is at 540.7 which is +7% from current levels. This will close the Friday gap but still not the Thursday gap.

Anything over the +7% bounce from current levels, we may have to seriously consider that the current levels are the lows for this drawdown and the chances of a V-shaped recovery rise.

One last thing before I sign off for this weekend’s note. Gold.

Almost all assets have taken a beating and Gold was not an exception. However, when I review the GLD daily chart, I see that price bounced of it’s 20-day moving average and closed above that.

Unfortunately, the GDX (Gold Miners) and SLV (Silver) has not had the same resilience. They fell much harder.

Oh, and the Digital Gold - Bitcoin - chart is also interesting. I use the IBIT daily chart below. IBIT is the spot Bitcoin ETF.

We can see that Friday was actually an up day. Also, price has not (yet) made a lower low like the stock market indices. Could this be the time when Bitcoin shows up as the leader of risk assets and also shows that it does not always do what the stock market does? Time will tell.

Have a great week ahead. And take charge.