A 400 Point Dow Day?

Before you get ultra bullish, realize that the sharpest volatility price moves to the upside often occur during a bearish downtrend. That’s likely what happened today.

The day began with a strong upside gap in all US Indexes, and proceeded to a near 50% gap fade, followed by a strong surge of buying power (combined with short-covering) into the close.

When the dust settled, the Dow Jones Index climbed more than 400 points today, representing a 3.5% daily increase over yesterday’s close. The NASDAQ and the QQQQ ETF closed 4% higher today.

Did anything change on the daily chart (DIA is shown)?

The quick answer is surprisingly “no.” Although price completed a large volatility price move to the upside, it is still beneath the falling key 20 and 50 period moving averages, which are both a good distance beneath the 200 period moving average, representing the most bearish orientation possible.

If indeed price continues to trend higher as it may, price will have likely broken these key averages and carved out a higher low than the January lows. This does little to change the current bearish structure at the moment before more buying (with short-covering) enters the market.

Volume was relatively light today, given the large magnitude of the intraday price swing, and unless we get higher prices on higher volume, then there is a developing divergence.

Did much change on the weekly chart? Let’s peek at the S&P 500 chart:

There appears to be a larger consolidation pattern taking place within the larger frame of the market, which has yet to break either up or down. Price has tested and successfully defended both the rising 200 period moving average and (near) the January intraday low.

Let’s rise a little higher and peek at an interesting insight on the S&P 500 monthly chart:

 

The S&P 500 Index recently inflected twice (intramonth lows) off the 38.2% Fibonacci Retracement line drawn from the bear market low to the recent bull market high.

Price also has failed to close beneath the key 50 period moving average (which could act as support) on the monthly chart. Notice that the last 4 months in the market have closed lower.

Odds may shift to favor a counterswing up, but recall that the upward swing is currently just that – a counterswing. Until the trend undergoes the formal change from down to up, we are still in a relatively dangerous situation for buying stocks at the moment.