Is THIS rally for real?
The market is now rallying in the seasonally strong Thanksgiving holiday period. Is THIS the one that we can hang out hat on and declare a bottom? As of now - definitely not.
This bounce came out of a deeply oversold market that looked to be on the verge of yet another sharp leg down last Friday until President Elect Obama announced Tm Geithner as his choice for Treasury Secretary. The sparked the now famous "60 minute rally" that squeezed the shorts and brought out some bargain hunters. Was this move able to sustain itself? We will never know because on Monday, the government announced its bailout of Citigroup, pushing the indices higher yet and still squeezing the shorts. On Tuesday, the Fed announced the creation of another facility to ease the logjam in lending and encourage the writing of new mortgages.
What does all of this mean?
First of all, this economy is still in very bad shape with the government swelling its balance sheet by applying short term band aids to the areas that are hemorrhaging the most. Remember - we still have a long line of businesses that have their hand out and are asking for their own personal bailout.
WIth that said, we also know that the market bottoms well before the economic data catches up, so we are always on guard for THE bottom.
Where are we now?
This bounce was predictable because both the Nasdaq Momentum Oscillator and 14 period RSI moved into triangle formations as prices crashed to new lows, thus creating a bullish divergence. See the Nasdaq chart below:
Does this mean that we are heading sharply higher from here? Probably not yet, but a much larger scale bear market rally is brewing. Whenever selling pressure is strong, snap back rallies are caused by shorts locking in profits, bargain hunters trying to pick bottoms, and by forced covering of shorts by weak hands that are late to the game.
With those things working to currently drive the market higher, let's have a look at the S&P 500 on a daily basis using the chart below. Notice how the advance/decline line in the bottom pane has continued to push to new lows right along with price, yet the NYSE Volume Oscillator in the middle pane is already pushing back up into the area where reversals occur. That is the sign of a weak market folks.
Using the principle of market symmetry and cycles, this bounce should last until December 5-8. The first order of business will be for the indices to retrace the recent gains and see if the November lows hold. If they hold, we could be in for one monster of a relief rally. If not, another waterfall lower could develop. Remember one thing also in this market - volatility remains very very high, so if you use any type of stringent risk management procedures (stops, etc.), be prepared to be frustrated and sent to the sidelines even if your overall trade idea is correct. The countertrend swings have been brutal. Unfortunately, it looks as if THE bottom is still a long way away, at least another 6 - 9 months. Happy trading.
This bounce came out of a deeply oversold market that looked to be on the verge of yet another sharp leg down last Friday until President Elect Obama announced Tm Geithner as his choice for Treasury Secretary. The sparked the now famous "60 minute rally" that squeezed the shorts and brought out some bargain hunters. Was this move able to sustain itself? We will never know because on Monday, the government announced its bailout of Citigroup, pushing the indices higher yet and still squeezing the shorts. On Tuesday, the Fed announced the creation of another facility to ease the logjam in lending and encourage the writing of new mortgages.
What does all of this mean?
First of all, this economy is still in very bad shape with the government swelling its balance sheet by applying short term band aids to the areas that are hemorrhaging the most. Remember - we still have a long line of businesses that have their hand out and are asking for their own personal bailout.
WIth that said, we also know that the market bottoms well before the economic data catches up, so we are always on guard for THE bottom.
Where are we now?
This bounce was predictable because both the Nasdaq Momentum Oscillator and 14 period RSI moved into triangle formations as prices crashed to new lows, thus creating a bullish divergence. See the Nasdaq chart below:
Does this mean that we are heading sharply higher from here? Probably not yet, but a much larger scale bear market rally is brewing. Whenever selling pressure is strong, snap back rallies are caused by shorts locking in profits, bargain hunters trying to pick bottoms, and by forced covering of shorts by weak hands that are late to the game.
With those things working to currently drive the market higher, let's have a look at the S&P 500 on a daily basis using the chart below. Notice how the advance/decline line in the bottom pane has continued to push to new lows right along with price, yet the NYSE Volume Oscillator in the middle pane is already pushing back up into the area where reversals occur. That is the sign of a weak market folks.
Using the principle of market symmetry and cycles, this bounce should last until December 5-8. The first order of business will be for the indices to retrace the recent gains and see if the November lows hold. If they hold, we could be in for one monster of a relief rally. If not, another waterfall lower could develop. Remember one thing also in this market - volatility remains very very high, so if you use any type of stringent risk management procedures (stops, etc.), be prepared to be frustrated and sent to the sidelines even if your overall trade idea is correct. The countertrend swings have been brutal. Unfortunately, it looks as if THE bottom is still a long way away, at least another 6 - 9 months. Happy trading.
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