Counter-trend rally today

Stock indexes had a rather large dead cat bounce today. It might be better termed a dead lion bounce. It is characteristic of a bear market to drift lower, and then have very sharp counter-trend rallies. Volume was higher on most indexes on the way down, with less volume on the larger range snap-back rallies. The volume on the S&P today was a bit larger than on the decline yesterday, however it was less than on the preceding downbars. Range today was larger than normal. So with large range and relatively light volume, the way I view this rally was nothing more than shorts panicking due to some news. The news seemed to start with somehow a profit showing in Citigroup. Not sure how they cobbled the numbers together to come up with a profit in the first couple months of the year, but that’s the story. Also, there was talk of the uptick rule being reestablished. A little late. Wait until the market drops in half and then do something. Well, they did suspend shorts for a while, and that didn’t stop the plunge.

This rally was long overdue. It is no surprise. There was little in the way of indicators that would have positioned a trade in time. I’m sure there will be many blogs and newsletters that will claim to have called the bottom if this rally continues. Many bottoms have been called all the way down. The double stochastic indicator in the bottom sub-graph on the S&P chart did have a minor divergence, as indicated by the cyan lines on prices and the indicator. The indicator also refused to turn down as prices continued lower the last few days. However price action and moving average trends were still in a well defined downtrend. Swimming upstread can be done, but it is much more difficult in the long run that going with the trend.

It will be interesting to see if this rally can last more than a day or two. I would not expect a “V” shaped bottom. If a bottom has been made there should be tests of that bottom to see if selling comes in or dries up. Bottoms usually take time to form. There should be structure to the price pattern. There seems to be more downside in the averages, however many individual stocks seem to be so oversold that they are being given away at any price. One is GE. I did post a chart of GE previously, and here is an update. There was a clear hammer candle at the very bottom, as indicated by the lowest yellow line. It was suggested in that post that a rally at least back into the moving average was possible. This stock seemed to be thrown overboard with the financials, and only part of this company should be considered a financial. The extent of the drop seemed unjustified, and there was only about a 6 point downside risk. A call option with no expiration. There is obviously much overhead resistance. The next two key pivots are indicated by the upper two yellow lines. If the middle yellow line holds this rally, which would probably be close to the blue moving average line, I’d expect a re-test back down. Hopefully prices will hold above the price rejection tail on that hammer candle.

One last chart is gold. This is the same weekly gold etf chart that I’ve posted a few time before, but of course updated with current prices. The regression channel has not moved or changed. That downchannel was a huge corrective pattern, with prices breaking to the upside. That channel seems to be in the process of being re-tested. The top of the channel comes in at almost the same price as the blue moving average line, and momentum is now getting oversold. I’ve been hearing more and more about how the gold market is finished and prices will now go straight down. I’m not so sure. If that area of support should hold, with momentum turning back up, the uptrend may well resume. If that first line of support should fail, all bets are off. I suspect once the next trillion is proposed and it is clear that the government does not care if it totally destroys the currency, that gold will continue to find fundamental support. In the past the gold rallies have relied mostly on the decline of the dollar against other currencies. If fiat currencies in general are devalued, gold would increase on an absolute basis. Gold is not quite a barbaric relic yet.

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