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Tackle Today: Rallies are Suspect

October 6, 2021

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So says the trend. ≈

Traders,

Do you know why rallies in a downtrend usually fail? It’s the same reason that dips are generally buying opportunities in an uptrend. We could remind you that a trend in motion stays in motion, but let’s dig a bit deeper.

Suppose you bought the S&P 500 at higher prices. Given the recent rug pull, you are underwater and desperate to recoup losses. Up days bring you closer to breaking even. But, once you get there, emotions urge you to jump ship. You are what we call overhead supply, a seller into strength.

The longer the downtrend lasts, the more bag holders enter the equation. Each failed rally adds to the pessimism and expectation that future ramps will falter. Thus, the price decline becomes a vicious cycle.

No one knows how long the current downtrend will last. Maybe we’ve seen the worst of it; perhaps it’s just begun. Those who got defensive when we first broke the 50-day and reduced risk further into the subsequent mid-September bounce are reaping the rewards of their defensiveness.

We’ve now seen four consecutive sessions of 1+% moves. Worse yet, each day has reversed direction, sowing confusion more than anything. If the last two green sessions getting stuffed doesn’t convince you that rallies are suspect, I don’t know what will.

#TeamTackle


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