Does This Bear Market Rally Have Legs?

What a nice week we had in the stock markets.  We ended up almost 10% for the week and over 12% higher than the lows on Monday.  Lost in the shuffle on the down Monday was the fact that the intraday (and 52 week) lows in the S&P 500 index (^GSPC) from last Friday were not taken out.  We remained above the 666 level.

Let’s hope the markets don’t get evil like that for quite some time.  Although, it does give one pause to look at the 52 week lows and see that number out there.  OK, not for everyone … let’s move on.

Some bullish points to consider:

• Remained above the November lows - this level will now act as support
• MACD faster line crossing over the signal line and the histogram is getting higher
• On the price chart, we crossed over the middle Bollinger band - this could be an indication that we will head for the upper band

Bearish watch-outs:

• Volume is dropping - I sure would feel better if we had another big up day on strong volume.  Perhaps this is just the way our bear market rallies go
• The index is quite extended past its 10 day moving average - our last rally (santa claus) was marked by the index hugging the 10 dma - either the average is going to have to play catch up or the index will have to dip - most likely a combination of both
• See video below

One point that I wanted to talk about in the difference between bear and bull markets.  Look how rallies and sell offs act around the 10 day moving average.  We are currently in a bear market, and when you have a strong bear rally within that market, you will see the 10 dma acting as support and the bottom bollinger band acting as resistance.  You don’t seem to get that on snap-back bull rallies during a bear market.

Sharp rallies like the ones we had in November and last week (circled) don’t last long enough to have interplay with the 10 dma.  The volume drops and eventually they roll over.  When indices hug a moving average instead of bouncing off of it, that’s never a good sign.  You want to see the bounce.

It’s tough to trade these rallies because on the early days when the headlines are “will this rally last”, you don’t want to put money to work.  So you wait.  By the time you see the “we’ve gone up 20% in the last two weeks” headlines, you realize you missed it.  We have already gone up 13% from the lows in the S&P from a week ago.  We might only see another 7% move measured from the bottom - or we might not.  It is very difficult for the average investor to know what to do.

How much higher

If you consider a nice bear market rally to be 20%, then we have another 7% to go approximately.  Our target would be the 800 level in the S&P.  From the current level, that would be a 5% move upward.  If we are to head for the 850 level, which would be a nice 27% rally in the S&P, we would have another 12% to go from current levels.

I’m not predicting anything - this market taught me not to do that and I don’t want Jon Stewart posting links from my website calling me a liar.  Wait, do I?  That would be great for my traffic.  Just kidding.

My only positions are in my 401k right now.  So that will grow for now … then shrink again most likely … then grow again hopefully.  No trades for me right now.

A bearish perspective

If you want further bearish news, watch this Freetradingvideos.com selection.  He goes into possible topping out points for this rally in ways that I have not really considered.

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