Confirmed Bear Market Rally Underway

Jul 18, 2008: 8:04 PM CST

This week finally gave traders the ‘bounce’ they were anticipating, in terms of an overdue “oversold” technical rally.  Let’s look at this development and try to make some price projections on what might happen next.

First, the Dow Jones Daily Chart:

I think initially, my first thoughts are that short-sellers are covering en masse which helped ignite this deeply oversold technical rally.  Second, buyers have found immense value at these levels, and bottom fishers are emerging.

This has led to a ‘uniformity of thought’ and direction, resulting in three trend-style days in a row where buyers dominated sellers mercilessly.  Call this the “Revenge of the Bulls” if you will.  Notice the classic momentum divergence that preceded this rally underway.

That being said, the reason I call this a confirmed bear rally is because of the ‘violence’ of the buying.  Also, the broader trend is down, and price has now breached the falling 20 day moving average, confirming the rally.  The first major zone of overhead resistance comes in at 11,800, which is the same area as the January/March lows and also is the zone of the 50 period EMA.

For Fibonacci lovers (I myself am one), it’s important to pay attention to the following key retracement areas, drawn from the intraday high to low of the May to July move:

38.2% Retracement:  11,708
50% Retracement:  11,982
61.8% Retracement:  12,256

The impetus shifts to the bulls for their turn at driving the market for the short term – risk is now to the downside (short-side) until proven otherwise.

Let’s look at the S&P 500 Weekly Chart for more clues:

Another positive divergence on the higher time frame preceded this rally.  I was expecting this rally as early as last week and was able to play it aggressively when it materialized (but not before taking a few stops).

Now it is difficult to miss the rally, especially given the temporary bullish conditions of the indexes at present.

A large swing positive divergence has set-up, volume has hit capitulatory levels (buyers capitulated short-term, exhausting themselves), and a very clear bullish ‘hammer’ has formed on the weekly chart.

I am targeting initially 1,325 on the S&P as a minimal price objective, which corresponds with the moving average convergence, prior congestion (from earlier this year), and the 50% Fibonacci retracement of the March to July move (exactly at 1,320).

For reference:

38.2% Retracement:1,292
50% Retracement: 1,320
61.8% Retracement:  1,348

Let’s continue watching and trading these developments, but let’s also realize that this is a counter-trend move, and as such we should be vigilantly watching for any sign of a resumption of the primary trend to the downside.  Trading long here is roughly equivalent to picking up dollars in front of a possible steam-roller.  Yes, you can make money, but you should do so carefully and not overstay your welcome here.  Odds are that the primary down trend will reassert itself before long – there just may be 3 weeks to a month or more of ‘bullishness’ before that happens.

Trade carefully and well.

13 Comments

13 Responses to “Confirmed Bear Market Rally Underway”

  1. David Says:

    Thanks Corey. I arrived at 1292 on my spx review blog yesterday morning. ( Didnt dare ) say higher 🙂 I have some longs open but hopefully there will be a pullback ( from 1272 former support for our double bottom ) to get a cleaner entry on the SSO itself.

  2. Paul Says:

    I enjoyed your expertise on the current market status.
    I was following advice of a financial ‘guru’ who has
    stayed bullish from September ’07 to present.
    Unfortunately, I am down 20+% and am afraid to sell.
    I know if I don’t sell on the next rally, this bear
    could go on for years.
    Thanks for your time.

  3. Anonymous Says:

    Can anyone explain to me why when I go stockcharts.com and look at the same chart as displayed here (both the weekly SPX and the daily INDU) that the MACD looks completely different? It shows none of the divergence. Is the standard 12,26,9 configuration used? I expect I’m overlooking something really obvious.

    Totally confounded. Thanks.

  4. DHalsey Says:

    Great post Corey,
    I’ve been watching your blog for about 3 months now and always respect you opinion.
    Thanks
    DHalsey

  5. David Says:

    Corey,

    1292 is all I was prepared to call. I was feeling possibily excessivley bearish at the time.. lets see, see my own blog. Would be nice to get to 1325 though!

  6. Corey Rosenbloom Says:

    Paul,

    I’m sorry to hear that has happened – the same was happening in 2000-2002 throughout those times. There’s no guarantee the charts will line up as they did then, but it sure looks very similar (at least in the S&P 500).

    It’s certainly difficult to lose money, especially when those we trust were wrong and have led us astray. If I can be of further help, please let me know.

  7. Corey Rosenbloom Says:

    Anon,

    I do use a modified, enhanced MACD input. On stockcharts, I input the following: 3, 10, 16.

    It’s the difference between a 3 and 10 EMA, which is then smoothed by 16 periods. It serves as a swing oscillator, momentum indicator, and trend indicator.

    Thank you for your question.

  8. Corey Rosenbloom Says:

    DHalsey,

    Thank you for reading and for the comment. I feel honored to be doing this and feeling like I’m helping. I enjoy your work too from what I’ve seen on your site so far. Excellent work.

  9. Corey Rosenbloom Says:

    David,

    You’re doing very well so far on your blog. I enjoy the video analysis and your commentary. It’s difficult to set targets, but they help guide our analysis and our trading. They’re certainly not absolutes, but can serve as markers for what we expect along the way. Thank you for your comment.

  10. Anonymous Says:

    Can anyone explain to me why when I go stockcharts.com and look at the same chart as displayed here (both the weekly SPX and the daily INDU) that the MACD looks completely different? It shows none of the divergence. Is the standard 12,26,9 configuration used? I expect I'm overlooking something really obvious.

    Totally confounded. Thanks.

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