Technically Speaking: Stocks Bounce Off The Lows. Time To Buy?

On Monday, stocks solidly cracked below the 50-dma, but the bounce off the lows has investors asking if it’s “time to buy?”

The sell-off was not unexpected. As I discussed in “Investors Fail To Buy The Dip:”

“We can attribute the weakness on Friday to ‘quadruple witching,’ where every type of option (stock index futures, stock index options, stock options, and single stock futures) all expired simultaneously.

However, history is also not on the market’s side, with the S&P 500 averaging a 0.4% decline for September, the worst of any month, according to the Stock Trader’s Almanac. Friday, in particular, began a historically weak period for stocks as those September losses typically come in the back half of the month.

Also, the markets are a bit nervous about the Fed’s meeting next week with an announcement of “tapering” asset purchases expected.

With the market very oversold, a counter-trend bounce next week will not be a surprise. However, if the market fails to hold the 50-dma, the risk of a more substantial correction is likely.

I have updated the chart below for Monday’s close. Note the similarity to the March period where the market closed well off its lows for the day. That bounce off the lows came with similar oversold conditions.