Here's some good stuff from the always-worth-reading John Hussman:
Bear market rallies from oversold conditions are not predictable, in the sense that a market that has endured a steep selloff can easily continue lower another 10%-15% or more. Still, there has historically been some tendency –- on average –- for the market to rally off of deeply oversold conditions. The problem is that those generally positive averages mask an enormous amount of variation, so the actual return/risk ratio isn't nearly as attractive as one might imagine.
With the warning that the following figures do mask a very large amount of risk and variation, the charts below present the average percentage returns of the S&P 500 in the weeks following points when the index was at least 10%, 15%, 20%, 22%, and 25% below its 50-week smoothing. The 22% category is included because the sample size quickly becomes very small beyond that point. I've included two charts – one including data from 1940 through 2007, and the second including data from 2008. Note that the inclusion of 2008 makes an enormous difference, because the market simply failed to advance despite very deep compression -– a reminder about the risk and variation within these averages.
Oversold bounces: Average cumulative S&P 500 % returns 1940-2007 based on starting % below 50-week smoothing (time scale measured in weeks):
That's some serious mean-reversion.
Read the whole thing. And while you're in Hussman's 'hood, read this from Bill Hester on the significance of trading volume in bull markets and bear rallies.