MAILBAG QUESTION:

" whats your opinion of today's big rally. end of correction?"

MY RESPONSE:

I think the Market, like Congress, has gone slightly crazy. I don't think the average investor or trader understands the stock market much better than they understand politics. Today's rally, while offering a trading opportunity no doubt, didn't suggest to me that the bull market resumes shortly. In terms of the bigger picture, today's sharp rebound looks like a short-covering rally and a speculative attempt to buy into a bottom, especially when the Dow held it's prior low and set up a possible double bottom.

Why a promise to kick the can down the road a few weeks on a debt ceiling rise, but to do nothing about a government shutdown is treated like things are ACTUALLY solved politically is pretty crazy thinking. We will face this impasse again is what I think, so I don't 'trust' today's market rebound especially.

On the other hand, as a technical analyst primarily, I have to 'respect' and take note of the possible double bottom low made in the Dow 30 (INDU) on Wed-Thurs. INDU was the first to form what I consider to be an 'obvious' top when it formed the reliable formation of a double top.

The Dow has very often been a bellwether of trend reversals. True, it's only 30 stocks and all but the mix of those 30 and the chart patterns for INDU often tends to be a good predictor for the rest of the market. It didn't seem like the Nasdaq would ever have a corrective dip but it did finally. I think a bigger correction could be coming, but more on that shortly. First, the Dow chart.

The S&P 500 (SPX) Index on the recent decline, into yesterday's (Thursday, 10/9/13) low, pierced SPX's up trendline dating from the November 2012 bottom. Volatility, as measured by the VIX, got up to a peak yesterday (around 21) last seen in late-June.

Unlike the Dow, SPX held ABOVE its prior low, which is bullish. This recent low (or a double bottom low), in that the Index held above the prior bottom, suggests that SPX's basic uptrend is intact. 1700 is now near resistance, with pivotal next resistance at the prior high in the 1730 area.

Based on SPX's higher relative low versus its last downswing low and with SPX having gotten near an oversold reading in the RSI, would suggest a bottom. A stronger case technically would have occurred if the Index had 'held' its up trendline and not fallen under it, but this was not a long-lasting affair either.



The Nasdaq Composite (COMP) Index, in terms of its daily chart, hardly corrected or dipped much at all relative to its recent highs. COMP did fall under its 50-day moving average finally, but it as a 1-day affair only. I have sort of a '2-day rule' which is that a single day above or below a key resistance or support, that is reversed by market action the NEXT day, isn't necessarily significant in terms of an overall trend reversal.

Technical/chart COMP resistance is at 3800, extending to the upper channel line currently intersecting at 3843. COMP's daily chart looks quite bullish. What could be bearish? There is a very long-term multiyear chart consideration I've written about before in this space, which is to also look at COMP on a monthly chart basis.

I look at monthly charts from time to time, which interest me from a long-term investment perspective, as was true for Charles Dow eons ago.

When I look at my last chart, that of the MONTHLY Nasdaq Composite, I consider its pattern to be that of a rising bearish wedge, which is typically a stock or index in the last stages of a trend that will be coming to an end; ahead of at least a major counter-trend correction.

Moreover, COMP having made a 66% retracement relative to the huge bear market decline of 2000-2002 is significant to me, as retracements of around 2/3rds often are about as far as a recovery move will progress. I consider this facet to be MORE significant when seen in conjunction with an 'overbought' extreme as is also highlighted on the chart below.

I couple the aforementioned technical points made above, with my assessment of the U.S. being in high risk of an upcoming 'induced' recession. Recessions are almost never brought on by deliberate action; sometimes they are by reckless action. My technical 'danger' points are coupled with my read of the current polarized political impasse. Stay tuned on this and I do hope for the best, but this time I'm not the usual optimist I tend to be.


GOOD TRADING SUCCESS!