Bear Market rally update « studentofmarkets

Bear Market rally update

April 1, 2009 by: Chris

Well … that was a busy couple of weeks.

I hardly had time to follow the stock markets much less analyze the charts and write about them. When last we spoke, we had a nice Bear Market Rally going. We had gone more than 20% off of the lows. Well guess what … we’re still rallying, although it is currently under some pressure.

As I mentioned after the third day of the rally, watch out for the 825 level because that appears to be a powerful level of resistance. The reason for this was the high volume at that price level. Dan Fitzpatrick likes to call this the “I want my money back trade” – people who bought at a certain level are happy to get out once the market returns to that level and they can say at least they didn’t lose anything. The 750 and 800 levels were important stopping points, but what eventually did this rally in was a high volume level of resistance.

Does that mean that we are 100% done with this rally? I mean we bounced off of the 50 day moving average today!

Well, in a healthier market I might agree with you. I believe if you have traded this market profitably, you ought to take those profits to the bank. Too many bearish signs out there:

- Volume is dropping. I’ve said this before and it hasn’t actually proven to be a problem, but I still don’t like it.
- MACD is rolling over. While this is not a bearish sign in and of itself, in a bear market, I do not like the odds of a turn around and bounce off of the signal line
- Our oscillator is flashing a sell signal with both lines falling out of the overbought range.

None of these is a sell signal by themselves, but I think there is less to like about this market now compared to mid-March. I suppose the Ides of March were to be feared by the bears.

There is another reason not to like this market. It’s not technical, but fundamental – with a touch of “headline risk” thrown in there. It’s called EARNINGS SEASON.

I’ve read and seen several stories about how Q1 earnings are bound to disappoint. This could be a case of expectations being too high. People want to be bullish again. They want to see some earnings growth again. They want to believe the market bottom is in.

But I do not believe the market is ready to confirm any of those wishes. I think this bear market rally has seen its top.