Mild Selloff After Sharp Drop Sets Up S&P For A Bounce

In the past I’ve found that weak bounces after strong selloffs have had bearish short-term implications. Wednesday’s action just missed the weak bounce as the S&P finished marginally lower. So tonight I looked at S&P performance following a sharp drop and then a marginally lower day. Below I show the 5-day return across a spectrum of possible % declines between 0 and X%.

(click to enlarge)

Rather than the bearish results found when the market undergoes a weak bounce, we see here that limited additional selling carries a bullish expectation over the following week. The edge remains fairly consistent regardless the level of decline between 0% and 1%.