Big up day, volatility continues

Stock indexes surged higher today, with the Dow rising almost 900 points, its second largest point gain ever. Today a huge chunk of the move happened again at the very end of the session, but this time the indexes were able to build on the gains of the day instead of a last minute reversal. Yesterday I suggested that the markets looked so bad that they might be ready for a move the other way. That was only a guess. I had no signal other than gut feel, which is wrong more than it is correct. After the fact it is easy to find reasons for the rally. On the chart of the S&P 500 etf you can see that prices had come back down to the previous lows. That low area now looks like support. Yesterday it looked like prices could easily smash through those lows. Also, bar range had contracted at that low, suggesting there might be a large range bar today. Some traders trade opening range breakouts when bar range contracts to the lowest level of a certain number of bars back. That was the case yesterday, however historic and implied volatility were sky high, and that would most likely have negated following such an approach. If not, then a breakout trader would most likely have taken the initial trade to the downside, as that was the first direction after the open. After the move up today, there is a divergence between what could be a double bottom on prices, and the momentum indicator in the bottom sub-graph. That momentum indicator is very short term, and can easily flip back the other way. I would prefer to see a divergence between prices and the advance/decline ratio, which is the line in the middle sub-graph. You can see that there is still much momentum to the downside on the advance/decline line. It still doesn’t feel to me like this market has experiences enough of a washout to be confident that a bottom is in place, although many individual stocks seem pretty washed out. This bounce may have a bit more to go if the fed pleases the market with the interest rate announcement due Wednesday afternoon. And there might be some relief once this election is over, even if the Marxist wins as expected, which is probably already priced in. Also, down Octobers are often followed by up markets into the seasonally strong months just ahead. All this seems to justify at least shorts wanting to cover, but with the extent of this bear market, it won’t be easy or quick to turn sentiment around. The trend is still down despite this huge one day move. Until the structure of the market changes from bear to bull, the bear still has to be respected.