Ostriches Are Sick Of Selling
We've been expecting this for some time now and it has finally arrived: the next bear-market rally has begun.
As Buzz Lynn pointed out in last night's Market Wrap, traders have heard enough negative news to deafen them. After awhile it merely becomes piling on and market bulls are now faced with two choices: walk away until next year or start buying. The latter is their choice and we'll have fun trading the upside as the summer run unfolds.
Wednesday was a pivotal day when indexes bounced at recent lows and rallied off the bottom from there. Thursday confirmed when higher lows held and Wednesday highs were then taken out late in the session. Friday was merely a day of rest that we needed to see before committing ourselves to trading the upside with confidence.
Speaking of Wednesday, it was a classic bear trap set by bulls to catch all those shorts hanging exposed. Measured by that 2.11 index option put-call ratio, there were more than a few roaring bears. My email inbox enjoyed a steady flow of notes projecting new yearly lows in the next week or two and imploring IS to play the downside with gusto. I don't know what the importance is of this website playing any direction to readers with such strong conviction... I'd assume they buy puts regardless what the website is able to do.
A customary review of our mid and long-term charts shows safety and opportunity to the upside into next month.
(Weekly/Daily Charts: Dow)
First thing of note is our switch to faster settings for weekly & daily chart stochastic values. The new setting reacts much quicker to pending market changes which is a plus during volatile times like these. I used this setting and others close to it years ago for the meat complex in commodities, and have been following them in equity indexes for a time to see how they behave. I think we have a more responsive tool than the slightly slower setting used before.
Which leads us to bullish readings across both time frames and still very early in the move, might we add! The Dow stalled right below its 20-DMA this session but another break above that shouldn't be long in the future ahead. A close above 10,550 and 10,600 are the real hurdles above.
(Weekly/Daily Charts: QQQ)
The QQQ has been coiling in a bull pennant formation over the past few weeks itself. I joked about this index being in a coma and that is quite true compared to the past couple year's action. We won't see daily QQQ six to ten-point ranges again for awhile if ever, but a break and run into the 50s zone is quite possible between now and Labor Day in my opinion.
(Weekly/Daily Charts: BTK)
Biotechs are poking at resistance and so is the Semi-Conductor sector (not shown).
(Weekly/Daily Charts: SPX)
The Big Index also stalled just below resistance as well. Do we see a theme developing here?
(Weekly/Daily Charts: OEX)
And the OEX is poised to break resistance as well and tried to do so today, but failed to get the big push before afternoon apathy set in. Can you name the two common denominators found in each of the above five indexes? Answers given below.
Poised To Break
We have bullish consolidations, price action just below resistance and oscillators reading to sprint up the charts. What does that tell us? The summer rally has lined up in the starters blocks and we may hear a gunshot on Monday.
Why rally? Based on what? Based on thin air and illogic, just like every other failed rally since March 2000. Day after sickening day, market bulls face market reality and stress out. Emotions drive human behavior and humans are the market. Right now the majority who by choice can only profit from rising markets are numb with negativity and will create their own reality.
Markets will rally into August, analysts will tell us the bottom is in and we'll experience the same cycle from oversold to overbought once again. We'll find out if the bottom lies behind us or ahead in late September / mid-October for sure. If companies come out with positive forward guidance in Q3 for next year, April lows will hold and we'll begin the subdued recovery from there. A few more bombs like JDSU dropped that hit us in October and April lows will be a mere speed bump on the way down from there.
Simple as that; nothing else to worry about. October, as it so often has in the past holds this market's key.
Time to start playing calls with reckless abandon. Price action will most likely chop its way in a steady grind up the charts where we look back and notice solid gains, day over day. Use a little less capital, widen stops a bit to hold thru turbulence and let time take over from there. The next upside breakout should see us above pivotal resistance and the money now lies at heights above resting price levels tonight.
Best Trading Wishes