The sp500 in the recent several days has staged a large rally. Friday’s move was more of a consolidation doji and in my view was constructive relative to previous moves at channel resistance. Considering the large previous 3 day rally we had and the fact that Friday’s move barely gave any of it back, I have to view that as a sign of strength.
We are on the third trip up to down trending resistance and there is a chance we could bust north early this week.
The huge reversal we saw early in the first week of October has the potential of being an important longer term bottom. We retested the August 2011 swing low on less volume in the form of a bullish spring.
So it seems we should tread higher from here but the question is for how long and of what magnitude. 1230 seems like a reasonable first target and test.
The 50 day moving average is still in quite a steep downtrend and the 200 day moving average is at a juncture were it could start a down slope or stay flat. The market needs to continually move up from here to turn the moving averages around.
There was a good posting by this blogger making an argument for a bottom. It is a compelling argument if we view Max new lows as a contrarian signal.
I still have to give the sp500 credit for not breaking down as badly as European indices. Seems to suggest that capital was fleeing to the USA despite all the bad news. So now if we see Europe get a sizable bounce, it could lead to an even bigger bounce in USA markets.
Earnings flood will start soon here in the USA and could bring a sigh of relief that the end of the world is not a done deal.
So it would seem that the most important question is how long the current rally could continue. Larry Pesavento was looking for 10/10/2011 to be a major euphoric shortable high which he says could transpire into an 87 crash scenario into the end of October 2011.
I spent a lot of time looking at the price action of the recent several months and the September 2008 period and there appears to be a striking similarity. There was into September 19th, 2008 a huge huge short covering rally. This short covering rally occurred right AFTER the market had seemed to do a successful double bottom testing of the previous climax sell zone.
But the peak of 9/19/2008 was a very important price peak as the market very rapidly plunged thereafter into mid October 2008.
If we are going to see Larry Pesavento’s scenario come to pass or see a repeat of the September 19th, 2008 scenario, then I would think after this huge one or two day short covering rally we should see an almost immediate and rapid drop in price support. I am skeptical this can happen again almost exactly like it did in September 2008, but I am willing to be open minded.
Alternative scenarios are that we tread higher now for multiple months or at least one month and form a lower peak from which we can get a real decline going thereafter.
I looked at all the DJIA stocks individually and I am hard pressed to find a majority of them looking extremely bearish. XOM looks like it wants to bust north in a huge breakout. Walmart, recently did an upward break of an important down trend line. IBM looks like it wants to kiss life time highs.
So for the bears to get continued traction after early this week we are going to need to see a real total loss of price support that wastes no time in falling apart.