We were looking for a bounce to get started last week, and we weren’t disappointed.

The S&P 500 dipped lower on Thursday. It retested its January low at about 1,812… support held… and it was off to the races on Friday.

[ad#Google Adsense 336×280-IA]The index finished the week with an explosive, 35-point rally.

That’s a gain of almost 2% in just one trading day.

The index tacked on another 31 points on Monday – putting together the best two-day rally we’ve seen in months.

Traders who bought early on Thursday and then held until [Wednesday’s] close are sitting on gains of up to 4.5%.

But there’s a problem…

None of the indicators we typically look at got oversold enough last week to suggest this is a sustainable rally in stocks.

The S&P 500 almost closed below its lower Bollinger Band – but it didn’t happen. The Volatility Index (“VIX”) almost closed above its upper Bollinger Band – but fell just short. The McClellan Oscillators for the NYSE and the Nasdaq dropped to -42 and -32, respectively – but they needed to drop to -60 or worse to reach extremely oversold conditions.

And the VIX option prices – which, last Thursday, were clearly slanted in favor of lower volatility, and were one of the main reasons we were looking for a bounce – have now shifted in favor of higher volatility in the short term.

If we were still in a bull market, I probably wouldn’t be so picky about things. All of these indicators got oversold enough to justify some long-side exposure. Even if we were early on the trades, the strength of a bull market would bail us out of any continued short-term decline.

But this isn’t a bull market anymore. It’s a bear. And bear markets aren’t as forgiving.

If you jump in too soon, or if you hang on too long, the bear will wipe you out.

When you’re trying to trade oversold bounces in a bear market, the focus shouldn’t be on trying to squeeze the maximum profit possible out of a trade. Wait for a good risk/reward setup, take profits quickly, and then step out of the way.

The stock market’s “crystal ball” gave us a good, low-risk setup to buy into the stock market last Thursday. We earned some fast profits as the S&P 500 rallied 4.5% from Thursday’s low until Tuesday’s high. Now it’s time to cash out those profits and step out of the way before the bear takes another swipe at the market.

We’ll look to get back in after that.

Best regards and good trading,

Jeff Clark

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Source: Growth Stock Wire