I’m more of an intermediate-term investor than anything else, but there’s no doubt the market (a) might have hit a sustainable low last week, and (b) could easily rally 10% to 20% and still be in a downtrend.  Thus I’m getting a bunch of questions talking about profiting from this bounce.

Well, I’ll show you two examples of “crashes” from the past–one in 1998, the other in 1987.  We’ll start with 1998:

Note how, when the Dow crashed into the start of September, it then had one sharp up day, followed by three down days.  It eventually rallied up to 8200, before re-testing the low a few weeks later, in early October.

Here’s 1987:

This one was a little different.  Here you see two strong up days off the crash low, followed by a relatively sharp three-day decline (from 2050 to 1800 … a 12% drop!), and another rally.  Eventually there was a re-test in early December, which was successful and led to the next bull market.

From these two charts, along with others we’ve seen, the market usually gives you a one- to three-day rally, then a sharp, quick decline that does not penetrate last week’s lows.  After that, it often chops higher for a few weeks before re-testing the low.

Conclusion: If you want to play this rally, you might get an opportunity to buy in a few days, after the market gives up some of its immediate rally.  And you’d probably want to sell on the way up, since a re-test of last week’s low is likely during the next couple of months.

Again, this is not really my ballgame, but history points to such a scenario.