Saved By the Bull - Convincing Reversal

When the market is searching for a bottom and you see it drop like a stone with heavy volume, you have to be on the lookout for that dramatic reversal that signals a bottom.  We got it today.  In a report a couple days ago I mentioned that the reversal had me unconvinced because it was lacking volume.  That was certainly not the case today.  In fact today marked the 4th highest trading volume day in its history (the biggest volume day was on April 18th 2001 when the Nasdaq traded 3.08 billion shares - surprisingly the only time it has traded more than 3 billion shares).  While the Nasdaq didn't close in the positive (the only negative of today's action), it did reclaim a very important support level at its trend line off of the October 2005 lows.  Have a look.

While the S&P finally broke down below the 200 DMA, it still had support of its trend line which it bounced off of in convincing fashion today.  I didn't go back and research volume levels for the S&P tonight, but no question it was up near a record as well.  One negative is the fact that it did not reclaim support of the 200 day moving average.  It would not at all surpise me to see the S&P retest that trend line at some point in the coming weeks.  You'd like to see that happen with declining sell volume.

The Dow broke through its 200 day moving average today too, but it was able to reclaim that support level.  Volume wasn't quite as good in the Dow, but impressive action nonetheless.  It still has support of its trend line off the October '05 lows around 10,500.  There certainly is a good possibility of testing that level before the summer is over.

So where to go from here?  I personally took profits in short positions today and dabbled in a couple long plays in my personal accounts when it was clear the reversal was taking shape.  This volatility has certainly created many opportunities for those getting in and out in a few days time, but those kinds of opportunities are better geared towards the trader who's able to track the markets all day.  For most investors (who aren't able to keep close tabs on the market during the day), the best option is to remain largely in cash while the market gyrates back and forth finding a bottom.  You'll save yourself the stress and probably quite a bit of money by continuing to be patient.  From here, we most likely see a continuation of the springboard action we saw today for a day or two, but it should come back and possibly retest the lows.  At this point, a big long signal would occur on some kind of confirmation day (a 2% move up with heavy volume).