The much-anticipated bear market rebound has begun

It is well known that bear markets can produce very large retracements in the opposite direction. Big bounces tend to happen in the worst markets due to the high level of sentiment prevailing.

While it is understandable that traders have been trying to catch up, they have at least four times failed to catch up with a sustained move so far in May. Every bounce failed, and there were lower bottoms for the S&P 500.

Another rebound attempt is underway now, and it looks like this recoil might have a better chance of gaining some traction. Circumstances have changed recently, and a better platform has been provided for some upside.

The biggest turnaround was the crash in the retail sector. The entire sector was hit hard after warnings from Walmart (WMT) and Target (TGT). This has caused the market to become more concerned about a recession.

Ironically, slowing growth and a possible recession may help deal with the inflation problem that has plagued the market. There isn’t much the Fed can do about a shortage of supply driving up inflation, but it can slow growth at higher rates and suppress the demand side of the equation.

There are some better actions in the reporting retailers now. Dick’s Sporting Goods (DKS) reversed a sharp rally on Wednesday after opening a gap, and Macy’s (M) is higher in its numbers after hitting a new low.

If the retail sector starts to find some support, that could indicate that recession fears are being ignored. In the tech sector, Nvidia (NVDA) fell Wednesday night due to light guidance but was indicated higher this morning. This is a sign that bad news is already priced in, and buyers are looking for good deals.

I want to be very clear that we are only dealing with a potential counter-trend bounce at this point, and it’s too early to even use the word ‘bottom’. Oftentimes, a counter-trend bounce can be strong enough to convince some people to make a bottom, but we don’t even need to have that conversation at this point.

The best indicator of a tradable bounce is when stocks stop falling due to bad news. We seem to have these conditions this morning.

If you are going to play in the opposite direction bounce, make absolutely sure that you are clear on the time frames and that you do not let a failed trade turn into a long-term investment.