Sunday, May 17, 2009

Case for Sucker's Rally to Continue

The market move from March 6 low (of S&P500 at 666, no less) has been called by many people as "a sucker's rally". You can read all about it here, here, and here. (The links will open a new window.)

In fact, as the links above will show you, they've been saying this is "a sucker's rally" from right after the March 6 reversal (the first article above is dated March 11) all the way up to last week in May. And now that the indices has had their first significant down week for the first time since March low, everyone seems to be saying "See, I told you it was a sucker's rally. Now it's over (about time) and we will head down big and take out the March low."

Let's see, a contrarian in me has almost an reptilian response to such a sentiment. Mind you, I am in no way a perma-bull like certain people you see on TV. Talk of "green shoot" simply creeps me out. (It almost feels like an insult to the reality.) I think we are in for a deep recession, which is NECESSARY in order to purge the misallocated, excess resources from the system. However, that's fundamentally speaking. The technical picture, I think, is different, and I'm not fully convinced that this "sucker's rally" is over.

This is a Dow Jones Industrial Average weekly chart going back to June 2006. 13-EMA and 34-EMA are pretty good indicators on changeover from a bull market to a bear market. 13-EMA crossed 34-EMA downward in December 07, signaling the start of a bear market. 13-EMA has been under 34-EMA ever since. Only twice 13-EMA has turned upward approaching 34-EMA; one was May 2008, the other is right now, since March.

RSI also has broken above the down trend line all the way back from May 07, first time ever since the market topped in October 2007.

The blue and green horizontal lines are Fibonacci retracement lines: Blue from the market top in 07 to the March 09 low; green from the October 08 high to the March 09 low.

The current "sucker's rally" has taken the Dow to 38.2% retracement from the March 09 low to October 08 high (Green Fib). So it is technically a good place to turn back. But I'm just wondering how many "suckers" have jumped in the market.

The V-shape reversal, I think, is more like a reptilian brain reaction to the preceding 4 weeks' steep decline. Then, for almost the entire month of April the market spent the time going sideways, slightly up but not like the V reversal days. All the while traders, analysts were warning it would collapse any day. Which it didn't.

To be really a "sucker's rally", the rally has to threaten to fill the huge gap down created in October 08. Right now, it is nowhere near it. The good place on the chart to achieve that goal seems to be 38.2% retracement from the bottom on Blue Fib, which pretty much coincides with 61.8% retracement from the bottom on Green Fib. That's about 9300-9400. At least Dow should go above 9000 to really sucker in the retail investors.

I do think it is quite possible that the November 08 low will be revisited, but for the market to crash down from here, I'm not sure. The larger weekly volume on an up-week compared to a down-week also speaks of support.

Now it seems most people who went short in April have covered. Given the uncertainty on so many economic and political fronts, it is quite possible, even probable, that the market will do what everyone says it will do: go down big, and I will probably eat my crow. (Besides, it's Mercury Retrograde time.) But in case it doesn't, you've read about that possibility in this post.

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