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.