In a year of incredible moves on the stock market today’s took some beating. I started writing today’s blog in a horrible state of mind. Any optimism I had for a relatively early resolution to our current travails (within 18 months), had been thrashed out of me, when I saw the Dow below 8,000, US unemployment at a 7 year high and the S&P at 5 year lows. Volume was pretty high and this looked like yet another disastrous week for equities.
I had started to ask whether or not money had any value anymore, in light of the likely bailout of the US auto-industry. I had started to question where on earth all this money was going to come from. I had started to contrast the attitude of Henry Paulson versus Mervyn King and how much I feared for Britain’s prospects. Perhaps I faced my own personal capitulation, but then the market rallied. And boy did it fly.
3 hours from the end of the close in the US we were roughly 5% down on the day. Equities then rocketed and closed up in the region of 6.5% and the emphasis of my blog turned on its head!
I am a market technician at heart and today’s rally was a classic one day reversal on massive volume. A one day reversal occurs when a market moves from positive to negative within a trading day or vice versa. Dependent on which direction it moves this is either a bullish or bearish signal. High volume reinforces the underlying interpretation of the strength of the move. The fact that the rally occurred off 52 week lows is another extremely bullish signal. This could start to form the beginning of a double bottom pattern, which is another bullish sign (more of this in a moment)…. you can surely start to appreciate why I might be starting to get excited again.
Sticking with the Dow, it touched 7,965 and closed at 8,838. Its 52-week low is 7,882. Volume was roughly 50% higher than the three month moving average. This moving average, of course, covers a period of extremely high volume.
Quite simply this is an incredibly bullish move, which is quite shocking when we consider the economic data piling up. If today is followed by more positive moves, my only interpretation on why this has happened is that this is some form of reaction to Obama’s victory. Remember that market moves can tend to happen 7 to 10 weeks or 3 to 5 days prior to a major event. We are roughly 10 weeks away from Obama’s inauguration.
You might be asking yourself “didn’t we see a similar 900 point rally only 2 weeks ago?” The answer of course to this is yes, but there is one critical difference. That rally started in the pre-market and grew in strength over the course of the day. This indicated a short-squeeze, when market participants, who had been shorting the market on one day, were caught out by a positive move overnight and were forced to cover positions.
While there will inevitably have been some short-covering today, the pattern of buying looked far more like professional accumulation. If this is the case and major market players are being tempted back based on valuations, then we could see a surprisingly positive end to the year.
So is this a bottom?
I haven’t talked about the system for quite a while now, as there has been little point, but now seems a good opportunity.
According to the system, the Dow’s September 2008 Retraction Zone is 9723:9735. I wouldn’t normally advocate using such a short-term analysis point, but given the importance of events since September I think this gives us a good base to start analysing the market again.
If the Dow breaks through the 9723:9735 barrier, then the next move could and should be back up beyond >11,000. Such a move would complete the double-bottom I mentioned earlier and the market should break out to the upside. As ever volume will be essential.
I can’t believe I am about to say this, but I really think this could be on the cards.
Short-term relief is desperately needed for the global economy. I talked on Tuesday about the danger of even more serious long-term damage being caused if markets continued to fall, so a rally into the last few weeks of the year will be a big help. Although I believe this relief will prove to be temporary it will hopefully mark the middle period of the Credit Crisis.
Let’s see what tomorrow brings, but fingers crossed there will be more buying.
P.S. I am sure I will return to my gloomy analysis in the not too distant future!