Traders: At Least A Short Term Bottom For Now

Traders got the one-two punch they needed to extend the rally out to two days: a good report from JP Morgan, and oil dropping below $130, now down over 11 percent in the last two days.

Financials rallied as JP Morgan reported earnings better than expected.

Consumer discretionary stocks like autos, hotels, and retailers all rallied as oil dipped midday.

Bears have written to me suggesting that these stocks have all been crushed and these bounces are "insignificant" in light of how far down they are from the highs. The point isn't whether these stocks get back to their levels of a year ago in two days; the point is that traders have been looking for some signs of at least a short-term selling climax, and there is some evidence that might have happened this week, at least with financials. As for a bottom, most traders I talk to don't believe that has happened.

What's a selling climax? It happens when we see a steep decline one day, followed by a rally the next day that finishes at the high of the day. On both days, we need to see heavy volume.

That is what happened to the overall market, and to financial ETFs, on Tuesday and Wednesday. Tuesday was a big down day on 7.3 billion shares, the second heaviest volume day ever at the NYSE, while Wednesday saw a big turnaround, also on huge volume of 6.5 billion shares.

Same with the financial ETFs. The Financial Select SPDR (XLF), a basket of the financial stocks in the S&P 500, had its largest volume day ever on Tuesday as it hit its historic low, then its second largest volume day on Wednesday as it had one of its biggest turnarounds ever.

Today, the XLF is again experiencing record volume.

Other financial ETFs, like the ProShares Ultra Financials (UYG), which provides 200 percent upside to financials, also had its largest volume day every on Tuesday and Wednesday.

So is this the bottom? Most traders are doubtful; indeed, it's surprising to see how many do not believe it is. But most would agree that there was some kind of selling climax seen, which will likely represent at least a short-term bottom.

Questions? Comments?