Signs That A Market Bounce Is Coming

by OptionStalker

The market does not go straight up or straight down. I realize that we are mostly day traders, but it helps to day trade in the direction of the longer term trend. Many of us hold short-term swings as well.

We are in a bearish trend and right when the profits start stacking up, violent snap back rallies strip those swing gains away. The key is to take gains on big drops and then to reloaded on failed bounces. Here is a sign that a bounce is coming.

Add Bollinger Bands (BB) to a daily chart. When the S&P 500 touches the lower band the market is oversold. That is NOT a reason to take gains on shorts. The market can stay oversold for long periods of time and it can keep dropping. When the S&P 500 rides the lower BB for at least a few days and it is making lower lows, watch the price action very carefully. If the candles start to overlap and you see mixed candles, it is a sign that support is forming. If the S&P 500 rides the lower end of the BB and it continues to stack red candles or to make substantial new lows, stick with your short positions.

When the market rides the lower end of the BB for a few days or more and the candles are mixed and overlapping, you can prepare for a bounce (take gains on swing shorts)

Since we are day traders we can trade the long side on these bounces. I suggest using smaller size because it is just a matter of time before the sellers return. When you trade the long side you will also be very aware when resistance is starting to form because you are watching the action tick-by-tick. When the bounce starts to stall and the selling pressure builds, you will know it is time to start shorting again and to take some bearish swings.

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In a bear trend there will be a constant “bid check”. Sellers will try to pound the bid. Every time the market bounces in a bearish trend, the sellers will test the bid to see how aggressive buyers are. Eventually, gaps down will be bought and they will form green candles on the chart. Those gap reversals will close on the high and that produces the green candles. When we get a second gap down that bites into prior gap down reversal and then it also recovers, you know the bid is strengthening. Next you want to see a nice green candle that closes above the high from those prior green candles. If you see this pattern, you can expect a decent bounce.

Watch for down gap reversals that close near the high. Those are the \”tell\” for bounces off off the D1 BB.

I believe that we are setting up for a bounce here. I am not going to guess when it is going to happen, I will wait for technical confirmation. It might last a few days or a few weeks. The height and duration of that bounce will tell us how aggressive/passive buyers are.

We are still not seeing those gap down reversals and green candles, but we could see them very soon. Now you know what to look for and what to do.

Trade well

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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