Samwise Quick Reference Handbook
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As always, thanks for the detailed commentary Sam! It’s a pleasure reading your analysis.
Hi Sam,
Is this based off historical data? Is there data-driven reasoning that concludes the 4th will ignored or is it broadly based multiple argument points: 1) rally duration, 2) the significantly high number of recent oversold bounces and 3) weakening strength of the bounces?
Thanks!
It’s more experience. There’s no data. I haven’t gone back and closely examined previous cases. And it’s not a specific third or fourth or even fifth set-up. There’s two things going on here that taken together point to an eventual failure VERY SOON. Maybe it’s the 4th attempt or 5th attempt. Just soon it’s going to blindside everyone.
First, anytime a trend develops in the ultra near-term — maybe it’s a bunch of bull flags or bullish pennants driving the market higher (this used to be a common thing in the 2003 – 2012 era). You might get four bull flags leading to breakouts, one after another. And so everyone jumps in on the fifth and the market pulls the rug. We get a breakdown.
So there’s that idea going on.
What makes matters worse is that we’re at the precipice of a correction. We’re about to enter a correction. And so eventually one of these days, the market is going to push oversold and then not look back. That’s the point.
For example, look at the third chart I posted above. With the title “QQQ Dec to February Consolidation Top.” Notice a recognizable trend?
The QQQ reached oversold FOUR (4) times between late October 2024 and late January 2025. IN all four instances, it leads to HUGE rebounds. Each move was 20-40 points on the QQQ. We get deeply oversold and then huge rebound. Each of those could have been traded for pretty big gains. A 20-40 point near-term rebound would produce 50-100% returns depending on the spread or calls purchased.
But then note what happened on the FIFTH setup. On the fifth set-up, we reach oversold and NO bounce. instead, the QQQ just continued lower.
So that’s an example of what we can easily see here. One of these days the QQQ is going to reach oversold, have a small bounce and then continue lower.
IN fact, we can’t have a correction without that happening. Here’s a direct link to the chart I’m referring to. It’s the third chart down in the briefing:
QQQ and SPY both nearing overbought. Trade watch on?
Not yet. We’re not quite there. We’re getting closer. We closed at 65 today.