A US Stock Market Rally This Week?

I have come to the conclusion that the probability of a nice-sized rally next week is pretty high. I won’t abandon the bear camp entirely because I do see at least another leg down sometime in the unknown future. The possibility of the rally extending for some time is on the table, therefore, it’s important to remain flexible.

The bullish case:

1) The tremendous strength displayed after the most important economic report was released is simply astounding. It is unreal, yet the market’s reaction must be fully respected, regardless of opinions. The price action said a lot.

2) We were unable to break S&P 500 (^GSPC) 802 after numerous attempts. We also broke through major resistance levels, including a clean close above the 20-day MA. The 850 level is amazingly resilient and an inverse head & shoulders may be underway.

3) We’re forming bullish stick sandwiches on every index. Volume remains steady.

4) We’re actually within striking distance of the 50-day MA, the all important fluid intermediate-term support/resistance level. Before, we couldn’t even get close to this moving average.

5) The health care, consumer discretionary & staples, technology, utilities, financials, and other sectors and industries (minus energy) are showing significant strength and have either broken their primary downtrends or are threatening to. This assessment is significantly different from last week.

6) Shorts who have shorted within the past 10 days will most likely cover their positions if we reach one more solid up day.

7) The VIX (^VIX) broke the 50-day once again, and this has been the 7th test. The VIX is starting to get more down days than up days, signaling more potential downside.

8) Various technical indicators are showing large divergences between the indicators themselves vs. price action.

The “Iffy” Case:

1) Uncertainty. Anything can happen unexpectedly that can drop the markets faster than you can say, “ohhhhh shiiii”.

2) We are forming a multi-day short-term neutral range, a 10-day symmetrical triangle, and a 1.5 month semi-descending triangle. Any breakdown below SPX 900 is bearish. A major down day on HUGE volume would nearly negate everything supporting the bullish case. The volume is key though.

What I hate:

1) The abundance of pattern failures. Triangles that don’t break, unexpected rebounds, etc. All that crap that doesn’t even allow you to leave your computer just once to take a piss in peace.

I’m going to have to lean toward the bullish side until the trend changes. In my post on Thursday, I stated that we needed to fulfill two steps. We did with the first one, but we were unable to breakdown below 820, or step 2. This was extremely important and it didn’t happen. I’m not going to go bullish unless 1) Monday’s gap fills, 2) we get a nice consolidating base, and 3) we rally strong on volume. If it’s anything less than that, then we’re going to drop back into the range. 875-880 is the ideal bounce off level.

Don’t get too comfortable. This bear is hardly finished tearing off people’s heads. I am neither bull-biased nor bear-biased, I only care about the direction. We may finally be climbing a “Wall of Worry”, but keep in mind that this bear market is far from over.

SPX 3-day

SPX 5-day

SPX 10-day

SPX 6-month

DJIA (^DJI) 6-month

NASDAQ (^IXIC) 6-month

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