Wednesday, October 1, 2008

Strong Bounce, Weak Volume

A few weeks ago I showed how weak bounces have a tendency to quickly roll right back over. The good news is Tuesday’s bounce was far from weak. Tonight I decided to show a similar study examining strong bounces after a sharp move to new lows:

As you can see there tends to be an immediate and lasting edge when the bounce is sharp like we saw on Tuesday. There was a weak spot with Tuesday’s bounce, though – volume. It came in quite a bit lighter than Monday. Adding this filter changes the results to look like this:

While there is no negative implications in the first few days, the apparent lack of big buyers (volume) does seem to have a negative impact on returns after day 4.

Instances are a bit low, and many of them aren’t very comparable to current conditions. There’s a big difference between a rebound from a 2% drop and a rebound from an 8% drop. Therefore, I’d suggest the appropriate thing to do with this study is keep it filed for future reference. Then perhaps review some of the charts I posted last night.

1 comment:

heywally said...

At the least, we should be able to 'safely' buy dips using some selectivity and small position sizing. Another 'vote' today but it's the Senate, where it should pass.