The rally off of the early March lows has been nothing short of impressive as it appears that the market has already discounted the mixed economic news coming out of late.  My feeling, though, is that this rally is based more on hope of a turnaround than an actual turnaround occurring itself.

Yes this morning we have Wells Fargo 'smashing' estimates and the market is euphoric, but can we trust anything that comes out of these financial companies any more?  Now the elimination of mark-to-market rules will allow fraudulent accounting to flourish once again on Wall Street. 

As you can tell, at this stage I am skeptical of this rally.  A bottom of some duration, however, may be in, as the strength of this rally has me taking notice.  My automated model is in on the long side and participating here, but I remain cautious toward this stage of the rally that just seems to grind higher without a meaningful correction to let more players in the game that refuse to chase.

One reason for my skepticism is the technical patterns being traced out by both the Nasdaq Composite and the S&P 500.  

Below is a daily chart of the Nasdaq Composite.  Notice how the price action is compressed into a rising wedge formation.  These patterns usually occur at the end of powerful moves.  Price gets more and more compressed on lighter volume.  That leaves price no where to go, and without the necessary volume to continue the prevailing trend, prices usually fall down out of the wedge.  Also notice the broken uptrend lines in the Nasdaq momentum oscillator (based on Nasdaq Composite advances and declines) as well as its 14 day RSI (based on price action).   Throw in the fact that the Nasdaq reversed lower right on cue at its April 6 cycle change point, and that tells me that the bulls will be hard pressed to run this much higher without a meaningful correction.

 

Next we will take a look at the S&P 500 which shows a similar rising wedge pattern.  The one positive on this chart is the break of the downtrend line by the NYSE advance/decline line in the lower pane.  That bodes well longer term for the market, but I believe some backing and filling is needed first.   Also notice the second pane down, where the volume oscillator has already started a mini downtrend, providing solid non-confirmation of the last leg of this move.  That is also a negative that says that it is not yet time to buy.



While these moves have short term red flags all over them, I am looking to get long once a solid retracement gives a chance to get in at decent values.  This move may have further to go.  I expect it to work its way higher into mid/late May, but I will not chase here.  I would like to see a pullback to 760 - 780 on the S&P 500 before jumping in.