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Minor Market Rebounds Could Be a Trap

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October market sell-off

In the previous part of this series, we discussed how weaker-than-expected third-quarter earnings could add to investors’ concerns amid the broader market sell-off. The S&P 500 Index (SPY), the Dow Jones Industrial Average (DIA), and the NASDAQ Composite Index (QQQ) were still trading with 4.2%, 3.6%, and 10.1% gains year-to-date, respectively, after a steep decline on October 10. In the auto industry, Ferrari (RACE) and Fiat Chrysler (FCAU) fell 8.8% and 5.3%, respectively, on October 10. Let’s take a look at why investors shouldn’t rush to enter a long position following any minor market bounce back.

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Fundamentals aren’t in favor

In the last few sessions, there haven’t been any real fundamental changes in the factors due to the broader market sell-off. A bounce back could turn out to be a trap for investors to enter the market, which could be followed by another sell-off.

Bruce Bittles, chief investment strategist at Baird, said, “We may need to see evidence of exhaustive selling, increased investor pessimism and a healthier breadth back-drop to suggest that near-term risks are ebbing,” as reported by CNBC.

According to another CNBC report, JC O’Hara, chief market technician at MKM Partners, said, “The selling is a result of selling the best-performing stocks this year and it is difficult to time when that selling pressure will slow.” O’Hara said, “Until we see some stabilization in that basket, we will continue to see weakness.”

Bottom line

Currently, investors should consider waiting for the market sell-off to settle down and give a strong reversal signal. Entering a fresh long position and adding a long position could lead to more pain for investors’ portfolios.

Next, we’ll discuss which key technical levels to watch. We’ll see what technical indicators are suggesting.

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