ASX 200 bounces off session lows: Is it too early to get your hopes up?

The S&P/ASX 200 stood no chance against the overnight carnage on Wall St, broad-based panic and liquidations, reaching lows of -2.54% in early trade.

The market somewhat stabilised by noon, down around -1.5%, staging one of its biggest intraday comebacks since January 27 and paving the way for a potential washout low.

In such face-ripping selloffs, a bounce is always brewing, especially as the market hits peak pessimism and extreme oversold levels.

A technical indicator like the relative strength index (RSI) was showing a reading of around 30 for the ASX 200 and most other sold off stocks.

The last time RSI hit 30 was on January 27, where the ASX 200 was down as much as -8.8% (6,506) in seven sessions. On that day, the market reversed off intraday lows and bounced strongly the next day.

RSI readings typically range between 30 to 70, with 30 indicating an oversold or undervalued condition.

S&P/ASX 200 with RSI (Source: TradingView, Annotations by Market Index)

Too early to get your hopes up

Some of the biggest one day or short-term rallies occur during a bear market.

Cast your mind back to last week, when the Nasdaq rallied 5.2% between May 2-4 after the Fed raised interest rates by 50 bps and said it wasn't actively considering a 75 bps rate hike.

Lets be honest. It wasn't likely for the Fed to hike rates by 75 bps anyway. At such levels of pessimism, even the ordinary was deemed as a win.

Just as investors were getting their hopes up, the Nasdaq dumps almost -10% the next three sessions.

Nasdaq Composite (Source: TradingView, Annotations by Market Index)

Volatility remains elevated

The S&P/ASX 200 VIX signals the level of fear or stress in the stock market. Generally speaking:

• >20 indicates a bearish and uncertain climate

• 15-20 indicates a slight bullish bias

• <15 indicates a bullish and less volatile environment

The ASX 200 VIX has spiked to 21.8 - on par with January 27.

S&P/ASX 200 VIX Chart

At such an elevated reading, anything is possible, which in this climate, seems to be a bad thing.