Remarkable Recovery Leads to Interesting Juncture

Jun 5, 2008: 8:34 PM CST

Who expected such a large recovery would occur today?  Let’s take a peek at some of the daily chart action in the broader indexes for clues as to why this intraday rally was so remarkable.

First, the Small Cap Russell 2,000 daily chart:

As mentioned previously in Small Caps Strongly Outperforming, the Russell 2,000 Index slammed past the falling 200 period moving average like it wasn’t even there and has rocketed just beneath new highs for 2008.

In a period of seemingly economic turmoil and recession, the Small Cap Index is mere points away from annual high.  Fascinating.  Generally, in times of economic uncertainty, the Larger Cap (Blue Chip) indexes outperform because of their ability to ‘weather the storm’ – maybe the storm has passed.

This continues to be a remarkable development, one we will continue to watch with great awe.

Next up is the similarly outperforming NASDAQ Index:

Similar to the Russell, the NASDAQ also has burst just shy of new highs above its 200 day moving average.  There appears to be far more support beneath price (via the key moving averages) than resistance, and the technical picture has improved vastly as a result.  Bulls have indeed surprised bears and pummeled them since the March lows.

The NASDAQ index is very close to new highs for 2008 as well.

Finally, let’s look at our friendly Blue Chip index of 30 solid stocks to see how it has held up:

The reason I consider the rally ‘remarkable’ is because price is very close to invalidating a confirmed ‘sell swing’ that is projected to take price down to 12,000.  The strength of the intraday rally was likely caused by panicky short-sellers (or perhaps hedgers) exiting their positions, which fueled higher prices in the short-run.

One cannot ignore the previous day’s doji (as I did with my greater than normal bearishness) as a precursor to today’s rally.  I must admit I took some stops due to my downward bias I tried to project on the market today.  It was an impressive rally indeed.

Price now finds itself with an interesting dilemma.  The Russell & NASDAQ are showing ‘clear skies ahead’ in terms of their technical picture.  The Dow Jones, however, is showing nothing but potential resistance ahead.  These ‘non-confirmations’ are puzzling to traders, and I must admit it has me intrigued as well.

The market is at an interesting juncture at the moment, and it will be fascinating to see which way price eventually resolves and to perhaps take part with the price action yet to come should a new and clear trend arise.  Stay tuned!

2 Comments

2 Responses to “Remarkable Recovery Leads to Interesting Juncture”

  1. Ellis Bouchard Says:

    Hi Corey, In reference to strategies I was wondering if you have ever used a stop and reverse strategy. Dr. Elder in one of his earlier books called it the Hounds of Baskerville trade. In light of what has happened this week with the market in general, it seems to be a viable option. I thought I had reasonable stops on many of my positions and all were taken out. What are your thoughts.
    Ellis

  2. Corey Rosenbloom Says:

    Ellis,

    I haven’t done extensive work on S/R systems, though some may have promise, but they’re inherently trend-following systems (such as a price cross above a moving average = long and cross beneath = short). The system would chop you up in flat periods and give select, large winning trades. I’m in the process of testing out new ideas and am focusing currently on the relationship between stops and targets exclusively, but in the near future, you may have inspired me to test a few S/R systems. I’ll update the results when I am able. Thank you!