Over the past few days the market has come off its lows on decreased volume. This is bearish. So how do we reconcile this bearish technical reading against sentiment levels that indicate we are near a tradable upside rally?
The way we see it, one of two things can occur here. The market can, with a burst of volume, break higher today or tomorrow forcing bears to cover. Or, the market can behave in the way it is technically expected.
Technically, the market should roll over from the resistance levels all major indices are now trading at. We submit that if it does roll over, fear will spike even higher than it already is and the roll over will find a higher low from which to launch a tradable rally.
We hope that the later takes place and that the market pulls back here. Buying at current levels does not offer a good risk:reward. Buying into a fear-inducing dip, on the other hand, offers a very nice risk:reward set up.
Of course we need to mention that there is a third possibility. The market could pull back from current levels and keep on going lower. Given that the Fed has shown itself willing to bail out the banks and considering current levels of fear, probabilities of such are quite low. As such, a dip here should be considered a buying opportunity.
As such, we are symbolically crossing our fingers and hoping for some downside today.
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