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Expect a Healthy Bounce Tomorrow


In after hours trading today, I finally got out of my cash position (I was 100% in cash right after that big 10-day rally and before this leg down) and took a rather sizable position in the SPY looking for a healthy bounce sometime tomorrow. When both the volatility index (VIX) and the S&P 500 or (NYSEARCA:SPY) both close in the red (a rarity), there's a 75% chance that the market will be green sometime during the next trading session.  Furthermore, whenever the S&P 500 is down 4 days in a row, in over 80% of the cases examined, there's a bounce on the fifth day.  See Cobra's Market View for an in-depth of this analysis.   

Moreover, while the market can remain overbought or oversold for extended periods of time, generally speaking, when the S&P 500 sees the 30 level on the 14-day Relative Strength Index, the market is likely headed for at least a healthy bounce in the majority of cases.  Though I think this degree of selling in the markets highly suggests that the market will be sold off on its first attempt to bottom, we will get a bounce some time very soon.  

I'm also looking for a strong bounce tomorrow in the NASDAQ-100 (QQQQ) and particularly in Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Research in Motion (RIMM).  Whenever the QQQQs has been red for 7-days in a row (down 8 days now), it generally indicates that the market is overextended in the short term and that a bounce is very likely in the cards.  If the markets open lower on the employment report tomorrow, I'm looking for the indices to immediately fill the gap early in the trading session and I'll probably exit my position at that time.

If however, the market ends up being very green on the employment report, I'm exiting my position right at the open because I think chances are, the markets will loss whatever big gains it posts in the early morning.  If we open green tomorrow, I think we close below the opening price.  If we open red, I think we fill the gap, then probably close flat to down on the day.   

For those who are interested, feel free to read my analysis, published at Fortune, on Apple's renewed volatility in light of the current weakness in the markets

Disclosure: At the time of this writing, the author holds a long position in the SPY. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.