The big rally that started on Tuesday continued today, after a brief pause on Wednesday. The chart to the left puts this rally into some perspective. It is a weekly chart of the S&P etf. The yellow horizontal line is drawn for the November lows. The market is not in the process of testing that low, but this time from beneath it. At the moment price is holding just above that major low. Momentum is clearly oversold and has turned up from the oversold area. As I said in the previous post, counter-trend rallies in bear markets can be fast and furious, as this on is turning out to be. There is urgency to cover shorts, pounce on perceived bargains, and jump aboard the train that appears to be leaving the station. However, the primary downtrend is still in force and it is still powerful. It is unlikely such a powerful downtrend can be turned around without much backing and filling, in other words, without much testing. One might conclude on this weekly chart that the plunge of 2009 was the test of the November lows and that prices are now rejecting that level. I don’t see enough evidence yet to come to that conclusion.
The chart to the right is the same index but on the daily compression. Price has pulled up to the darker blue line, which is the moving average that often represents support or resistance. Momentum on the daily is now overbought. There is a series of overhead resistance levels that must be overcome, with none really representing trend change without more backing and filling, thus creating swing points that could define a change of trend down the road. Also, volume had an increasing trend during the previous impulse down. The volume on this rally, while strong, has been somewhat less than on the decline.
If the bottom has been seen, which I don’t have enough information to conclude at this point, there will certainly be pullbacks for entry points, and hopefully those pullbacks will form better market structure to indicate the emergence of an uptrend. Buying of “V” spike bottoms is usually a bad idea. The train might be leaving the station, but the odds are there will be another one along shortly. And quite possible might be going in the opposite direction.
The chart above is of the real culprit of the market woes, that is the financial etf. This is a weekly chart, and have drawn lines showing the major swings of this index. You can see that the downswings and steeper and longer than the upswings. It is a near trend. When the downswings become shorter and the upswings start being longer and steeper to the upside, then one can swim upstream instead of swimming against the current. The blue moving average lines have done a good job of defining this trend as well. The cycle in the lower sub-graph is the Bressert 5 and 10 double stochastic. It does an excellent job of tracking the cycles, indicating overbought and oversold levels. And I might add that it just indicates the possibility of overbought and oversold levels. If a trend persists it can stay overbought or oversold, although the double stochastic has less tendency than the regular to stay compressed against extremes.