The pattern known as the “V” bottom, when markets pull back to support then quickly rise back to prior highs, never fails to take folks by surprise. And the reason it happens is simple… nobody sees it coming.
After a quick sell-off, prices seem to drift as if there are no buyers (volume tells us otherwise), and many traders short this first sign of weakness. That’s when you start to hear stuff like “buying the dip is dead” and “will this market just die already.” Underneath the surface, though, the market is alive and well, churning, shifting and rotating.
If the reversal starts slowly, that’s when the sell the rip crowd steps in. It’s only a matter of time, however, before those bears realize they’re over exposed and have to cover… and at the same time, the bulls who were too scared to buy, suddenly realize they better jump on before it’s too late.
So why on earth are we talking about V bottoms when we have Congress resignations, impending rate increases and a government shutdown looming? Well, because not only are big institutions NOT selling (as we’ve been saying in this blog for over a week now), they also ARE buying. Thursday’s overall volume rose 2% and markets logged an accumulation day across the board (last one was on 11/28, not too long ago).
As accumulation days start to bunch up close together, the potential for a trend continuation strengthens (yes we are still in a uptrend). All that’s needed to catapult the proceedings is a catalyst… the first of which is the jobs report on Friday coming right up. -MD
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