By Gregory Mannarino
It’s “Swing time” on Wall Street.
The CNBC headline on 20 March: “Dow tumbles 900 points to end Wall Street’s worst week since 2008.”
Six days later, it was Happy Days Are Here Again: “Dow wraps up strongest three days since 1931.”
The next day, 27 March, after the Dow fell 4 percent, CNBC boasted, “Even after Friday’s drop, the Dow ended 12.8% higher, its best week since 1938.”
Sounds great. Bravo! But the short market bounce rivaled that of a quick spike following the infamous 1929 Stock Market Crash and the onset of the Great Depression.
By months end, the Dow industrials and S&P 500 officially recorded their worst first quarters ever.
And yesterday, it was high times, with both the Dow and S&P soaring 7 percent.
The Law of the Land
Physical laws apply to everything, even the stock market. An object in motion will stay in motion until acted upon by another force, which will then, in turn, affect that said motion.
On 25 February, the stock market began to fall precipitously and went virtually straight down until 2 March.
Beginning on that day, the stock market put on three days of gains, and, on 5 March, the selloff resumed. The new selloff continued again until 24 March, when the market again “bounced,” only to begin falling again on 1 April.
In this case, these are the “Bouncing Phases” of a Market Crash.
The price action of any asset never moves in a purely linear fashion, and a falling market will always experience a predictable bounce. Often these are technical bounces where a falling market reaches a support level.
The speed of the current drop in the market is unprecedented – never in history has the U.S. stock market fallen so quickly.
Rapid market drops will always be followed by a bouncing phase(s). By understanding the “anatomy” of a market fall, you can capitalize on it.
Going back to physical laws, in a falling market, simply being able to recognize that a bounce phase will occur because another force acting upon it will have only a temporary effect, you can anticipate the next fall.
If you understand this anatomy, or the “Bouncing Phases of the Market,” as a trader, you can capitalize on it.
For example, say you are trading a market index and were able to recognize a Bounce Phase, having an understanding of how they work would allow you to get on the right side of the market by taking a short position against the index and thereby capitalize on it.
Often a Bouncing Phase can be easily visualized when looking at a technical chart. Following is an example of a very particular pattern seen in a falling market Bounce Phase, called a “Rising Wedge.”
The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows.
Also, you will find that the harder/faster a market falls, the bigger the bounce will be. Moreover, the deeper the next fall phase will go.
Being able to understand the simple anatomy of the market, and recognizing that Bouncing Phases occur regularly, can allow you to capitalize on these situations.
Today’s market is in a near free-fall situation. Absent of an enormous force acting against the current drop, a true bottom remains elusive. Despite every action, stimulus, rate cut, asset purchases, etc., thus far being thrown at the market, it continues to fall.
It is my current belief that with this much downward momentum, it will take a lot to stop this market from dropping much lower.
Sure, you can expect these Bouncing Phases to occur. Now that you can recognize them, you can capitalize on them, but, also, realize that in the current environment, the stock market can fall considerably lower.
And it’s looking to me like that’s where it will go.
