2/10/2014 1:57 p.m. Geneva time (7:57 a.m. Eastern Standard Time)
The S&P 500 (SPY @ 179.68) traded up sharply for the past two trading sessions which in and of itself is always bullish. It decisively broke and closed above a short-term downtrend line connecting the highs of the last 4 weeks.
However, several caveats to this potentially bullish case remain:
- given the extent of the decline (6% is 11 trading days) and the thickness of the gloom, a snap back rally should not be surprising (although I admit I was impressed that the market could stage it this soon);
- the SPY has regained just over half of the points it lost during the recent sell-off; rallies retracing half of the prior decline are not unusual during a serious correction;
- the SPY should be expected to encounter resistance at the last level of support (which was also the breakout level in mid-December) around 180.9; even if the SPY were to rally significantly higher from here, a pause at this level would be statistically more likely than a parabolic move straight up, and during this pause, there should be time for re-evaluation - a high, tight flag just below this area, for example, would be a far better signal that the market's correction is likely over than a simple 2-day rally up to this point;
- volume on up days is unimpressive - the 3 most recent up days had much lower volume than 5 of the 6 most recent down days, indicating far more money has flowed out of the market than in.
Using the iShares FTSE 25 ETF (FXI @ 34.40) as a proxy for the Chinese market, notice how some of the same comments can be made about the Chinese market as were made about the S&P 500, although the Chinese market has been selling off longer (since mid-December, or 42 periods versus 11 periods for the S&P 500) and has fallen more (16.5% versus 6%). Therefore, the Chinese downtrend is more established and less likely to reverse suddenly, although dramatic counter trend rallies are extremely likely. Bearish indicators of the Chinese market include:
- intact intermediate-term downtrend connecting the highs of the declining market since mid-December;
- two small bear traps (rallies that did not lead to even a day of follow-through buying - a very bad sign) and a very large bear trap from mid-November to mid-December, when the market gapped dramatically from 35.93 to 40 in two very heavy volume days, followed by subsequent filling of the gap and decline to well below the low point prior to the move);
- far greater down volume than up volume.
Caveat emptor. You don't have to catch the very bottom of a market to make a lot of money trading and investing. You can let the first few percentage points of a rally go by to make sure it's real and still do very well. We are not at the point where the rally in either the United States or Chinese stock markets is established as a new uptrend.
The S&P 500 (SPY @ 179.68) traded up sharply for the past two trading sessions which in and of itself is always bullish. It decisively broke and closed above a short-term downtrend line connecting the highs of the last 4 weeks.
However, several caveats to this potentially bullish case remain:
- given the extent of the decline (6% is 11 trading days) and the thickness of the gloom, a snap back rally should not be surprising (although I admit I was impressed that the market could stage it this soon);
- the SPY has regained just over half of the points it lost during the recent sell-off; rallies retracing half of the prior decline are not unusual during a serious correction;
- the SPY should be expected to encounter resistance at the last level of support (which was also the breakout level in mid-December) around 180.9; even if the SPY were to rally significantly higher from here, a pause at this level would be statistically more likely than a parabolic move straight up, and during this pause, there should be time for re-evaluation - a high, tight flag just below this area, for example, would be a far better signal that the market's correction is likely over than a simple 2-day rally up to this point;
- volume on up days is unimpressive - the 3 most recent up days had much lower volume than 5 of the 6 most recent down days, indicating far more money has flowed out of the market than in.
The key to making money in the markets is to remain flexible, never wedded to any idea, no matter how convincing it might have been yesterday, if new, compelling contradictory evidence becomes available today. I cover my short position at 181.66, the trailing 10-day high, but we are not there yet. I would not go long until and unless the market took out its 184.94 highs.
China, which has been the fundamental driver of this latest sell-off, does not look as though its decline is over.
- intact intermediate-term downtrend connecting the highs of the declining market since mid-December;
- two small bear traps (rallies that did not lead to even a day of follow-through buying - a very bad sign) and a very large bear trap from mid-November to mid-December, when the market gapped dramatically from 35.93 to 40 in two very heavy volume days, followed by subsequent filling of the gap and decline to well below the low point prior to the move);
- far greater down volume than up volume.
Caveat emptor. You don't have to catch the very bottom of a market to make a lot of money trading and investing. You can let the first few percentage points of a rally go by to make sure it's real and still do very well. We are not at the point where the rally in either the United States or Chinese stock markets is established as a new uptrend.
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