Better to Play the Second Bounce

It’s easier to play the second bounce, as opposed to trying to time the first. If you take a look at the chart above (SPY vs T2108), it is obvious that there is no sure fire method in timing the bottom of a correction.

The T2108 indicator (via telechart) measures stocks above the 40 day moving average. While it can be used in many ways, the most popular is to use it as an overbought/oversold indicator. When it reaches 70/80 or higher, the market is in overbought territory. When 20/30 or lower, and the market is oversold.

Notice that going back to 2006, major bounces and trend resumptions have occurred anywhere from 40 to almost 0. Therefore, it’s tough to say one should jump in because the indicator is at 20 and is oversold.

However, I have more confidence in picking entry after the first major bounce. Almost every bounce has pulled back in both price and indicator reading. Assuming history repeats itself, that is when I will take on larger long side positions.

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