Last night, during the 4pm daily broadcast, I discussed the markets and stated the market was due for a “reflex bounce” as soon as tomorrow. While the bounce in the market today is being attributed to further interventions by the Chinese government to try and forestall the bursting of the equity bubble in their market, the reality is the markets were just oversold following five straight days of selling.

As human beings, we always need a “reason” for actions. It is just how we are wired. If we stare at a series of random dots long enough, our brain will begin to find patterns and shapes in the randomness. The same is true for the market. News headlines are used by our brains to attach a reason to the randomness of market actions. However, turn-off the media drivel and look at price action itself and a clearer picture emerges.

As shown in the chart above, the recent market “sell-off” exhausted the “sellers” in the market on a very short-term basis. This “oversold” condition (yellow highlights) provides the catalyst necessary for a reflexive bounce in the market.

Importantly, the markets, have been able to find support at the 200-day moving average (dashed red line) which keeps the markets defined within the cyclical bullish trend. The 150-day moving average (dashed blue line), which had previously been very strong support for the bullish trend going back to December of 2012, has now been violated.

This support at the 200-day moving average keeps portfolio allocation models at, or near, fully allocated levels currently. This is because, up to this point, the longer term bullish trend has not been violated. As I discussed in this past weekend's missive (subscribe for free E-delivery):

“The decline this week keeps the market contained within the broader declining consolidation which suggests a lack of strength by bulls currently.However, the long-term bullish support (red-dashed moving average) now resides at 2085 which should afford some near-term support. However, a failure of that level will likely push the markets back towards 2040 once again.

If we step back and slow volatility down by using a WEEKLY price chart, a clear picture emerges.”