Choppy Waters Lie Ahead After The Initial Bounce

@TraderStewie put up a chart on the SP500 on 8/3/2011 explaining that; “The real bounce almost always comes AFTER a successful retest.”   The fact is, if you go back and study some of previous major sell offs, they all pretty much retested the first low.  That is one of the reasons why when I get involved in the mean reversion trades I only do it with an index etf.  On the retest when you start to see positive divergences; fewer new lows, higher RSI, MACD, etc…is when you pounce on individual stocks.

Here is @TraderStewie (must follow) $SPY chart:

Here are the charts from some previous sell-off’s:

1974

1987

1991

1998

2002

The 1974, 1990, 1998,2002, sell-off’s all started during the summer and retested 1-3 months later.  We all know when 87 happened.  This is just a potential road map, so choppy waters lie ahead for a couple of months.  BTW, we are yet to know where that initial low is, it could have been yesterday, it may be today, next week, I don’t know.  But the key is to realize that most sell-off’s like Stewie said at one point retest the first low.

Here is an off the top snap shot of these sell-off’s:


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