Sunday, March 15, 2009

Technical Picture - Confirmed Rally

Last week we said "The elusive bottom is in our sights. As we can see from the weekly chart of the S&P above, the head of the inverse H&S bottom is really taking shape. We could bottom as early as next week, or it could take a few more weeks." Read full post here.

This week I'm going to suppress the urge to say that we correctly predicted the bottom, because we don't know if this is the bottom. We have plenty of reasons to believe that March 5th was the bottom, however, we won't be able to confirm it until the reaction high from the November lows has been taken out. That would be the early January highs around SPX 944.

Markets hit 12 year lows in the first week of March. What's so significant about 12 year lows? Twelve-year lows are rare. Thomas Lee, U. S. equity strategist at JP Morgan, says the event has only happened twice, on April 8, 1932 and Dec. 6, 1974. The 12-year low in 1932 was three months before the end of the bear market, while the 1974 low turned out to be precisely the low.

So if we compare the S&P with the NASDAQ, the former took out 12 year lows, the latter did not. However, the NASDAQ has been in a cyclical bear market since the tech bubble burst in 2000. From trough (2002) to peak (2007), the NAZ just edged back into the retracement zone.

Tech stocks led the 2003 recovery, however after 6 months, their leadership waned as depicted by comparing the two monthly charts above.

Expect the same this time round, Financials and to a lessor degree, commodities should be strong in the early stage recovery, but I expect tech, which made a higher low, to finally resume some leadership in the next stage of the recovery.

IBD says we are in a confirmed rally. Tuesday was the reversal day and Thursday the follow through day. We are approaching overbought levels, and I would expect a shallow retracement on lighter volume to start early this week.

Gold is struggling, but it could get a boost on a lower dollar.


Fred said...

A lot of hanging man ....

john said...

Nice summary view on things. Volume though, on the SPX, was perhaps a bit less than solid during this squirt.

Jamie said...


Yeah, lots of small HM and that's part of the reason I'm expecting a shallow retracement. It's important that we don't retrace too sharply on strong volume, otherwise, this is just another technical bounce.

Jamie said...

Thanks John,

Volume was just slightly less than two previous sell-off weeks and well above average, but, you're right it would have a lot better if volume had taken out those two last spikes.

TraderLars said...

personally gold looks technically bearish to me... i wouldn't be surprised if that cracked back underneath that 900 and tested at least 850.

as far as the broader market goes, i still haven't seen my signal for a long term bottom. to me this looks like we are entering a downtrend phase after the crash, similar to 1929-33. this is where the true wealth destruction occurs as folks constantly try to buy to bottom.

Jamie said...

Hey Lars,

I think most people would agree with you.

My analysis goes like this: if gold is no longer safe haven against falling market, it is weak which is implied in my analysis. However, gold versus $USD could come into play. We correctly predicted that the dollar would pullback following a fake BO. Now the dollar is oversold and the market overbought so we expect both to retrace to the R-zone 38-62% of the last leg. If the retracements are orderly with lighter volume and they observe the R-zone as support/resistance, we expect the dollar to continue lower which will be a positive for the market.

As noted in my weekly post from March 8, I would have preferred a decisive candlestick pattern such as a hammer to mark the bear bottom, because offsets can continue to offset indefinitely. We got an offset and we continue to monitor the market closely for a fake bottom.

JF David said...

My guess on this bear market is that we are in the retracement of the after war credit expansion. I think we could go down for a while before the ultimate bottom.
Big things could happen soon to fixed assets like US treasuries, highier yields on bond = lower valuations for stocks.

I wish to see a capitulation before turning more bullish.

Jamie said...


I would have preferred capitulation too, but I'm working with what the markets gave us and taking it one day/week at a time. In the past, I would anticipate too much,or have strong opinions, and ended up missing big moves out of stubbornness. Now, I'm trading what the market dishes out and I'm making more money.