Stock indexes resume rally

Stock indexes have moved into what appears to be an extended counter-trend rally. The chart above is of the Dow Jones Index. I chose this because it seem to represent nearly every individual stock that I follow, as well as most other broad based indexes, foreign etfs, and even some gold stocks.

Almost every stock and index has a similar look to the blue trend lines that are now facing north. Also, many stocks and indexes have even pulled back toward the newly uptrending moving averages in what appear so far to be a successful test of those averages. It would have been nice for the test back down to last a bit longer and be able to form more of a bullflag. Of course that could still happen if more testing is to be done. This is April fools day after all. Maybe this first bounce will not hold and more price structure can develop. However, the double stochastic in the lower sub-graph is just turning up from the oversold zone. It barely got to the oversold zone. I feel more comfortable when it goes a bit deeper, with more of a “W” shape like it did in late February and early March, although then the trend was still decidedly down. One can’t have everything. Rarely do all the indicators line up perfectly to my satisfaction, and on those rare occasions when they do, the signals still can fail.

My gut feeling is that this could roll down a couple more times to retest the moving average lines, especially the darker blue line. But that gut feeling is likely influenced by my dissatisfaction with the government being on a fast track to socialism, which can’t be good for stock markets in the long run. For now I have to trade what I see. I plan to use out of the money bullish put credit spreads to give this market plenty of room to retest a few more times. If it goes straight up from here any profit will be limited to the credit recieved. Volatility is still too high to purchase options as the premiums are too high.

The market is still very low relative to where it had been a year ago, so even a significant rally if one should occur here, will likely only look like a little blip in the longer term when this bear market resumes. As encouraging as the short term might look on the daily chart, the longer term weekly and monthly charts still show no evidence from the price structure of a turn-a-round, except perhaps momentum in both cases pointing up from oversold levels, which is not enough to signal trend change. See previous post for a weekly S&P chart, showing steep downtrend with uptrending short-term momentum.

2 thoughts on “Stock indexes resume rally

  1. Bobby,
    Ideally about 1 standard deviation based on at money call implied volatility. Most option charting packages such as optionvue or thinkorswim can calculate that. Usually you won’t get much premium going out that far so I usually look at a major swing point, if there is one, and put the short strike somewhere between that and the one standard deviation level. I don’t like the short put being much more than 20 or 25 delta, and on spy will usually go two strikes out for the long option. But if the credit is too small I’ll pass.

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