Impaled on the Bear Rally

This (presumably) bear rally continues to amaze. In an effort to understand it (and determine when it will end) I am going to compare it to two other rallies. The first is the rally on June 26th. Here's a picture of the two:

At this point I want to classify both of these rallies as "relief" rallies. The June rally was so powerful at the time that it completely shook me of my prior assertion that the market had topped and was heading to 106. That shaken belief cost me considerably. The current rally also has me rattled but I am determined not to be shaken of my conviction that this bear correction has not ended.

The similarity in these rallies is striking. Both came directly out of strong bear moves. Both were very steep which is a tip-off to me that they are not sustainable. The June rally was characterized by an incredible leap into thin air at the end with a gap.

The technical points are also remarkable. Note how DeMark has ticked off a 7 count in our current rally (pink arrows). It eventually ticked off an 8 count in the June rally although the 7 count was the high point. Note also how both of these rallies come from DeMark perfected buy setups that called the end of the major bear moves (note to self!). Note how both rallies got new wind when they crossed the 50day moving average (see the big green bars that created, especially in June when that point coincided with the technical resistance line). Note how neither rally (so far) has gotten past the prior high.

To my chagrin both of these rallies fooled me. Yes, fool me twice. The black lines denote my targets which were never reached. Twice I was beholden to the targets and as such was caught flatfooted by the rally. Both times the rally caught me short about halfway through (in June I just held my shorts and shook my head, eventually making money. This time I stopped out and re-entered my shorts between 120 and 122).

The June rally was led by Apple. This October rally actually began the day before Steve Jobs' death and Apple was temporarily held back. The rally's second wind however has once again come on the back of an Apple surge.

Let's check out the 30 minute charts to see if the rallies bear further similarity:

Here I've put the current rally on the left and the June rally on the right and scaled them to approximately match (noting that today's rally is much greater in percentage and point terms). It's a pretty good match up until Friday. Can't really kick myself for going short on Thursday given that pattern. I think it's certainly ominous for the rally to have left off on Friday with a big upswing like that but there's a lot of technical pressure right now so I think one has to be in it.

Gaps:

One thing I actually like about today's stopping point is that it gives us a perfect 38.2% Fibonacci alignment (from open of bottom, excluding the spike) that aligns with the gap and the moving average. This sets up similar action to the June rally where the market quickly slides to that point, finds some support (note the curved pattern) and then briefly rallies back to the level of the top gap. Actually, that spike on the SPY is spurious and there really was an island there that needed to be filled. Check out the DIA:

Today's DIA chart looks just like the SPY, but back in June one would have had much better signals trading the DIA as the gaps basically provided a roadmap for the market action.

Finally let's compare indicators for these two rallies:

Both rallies amazingly had two negative reversals. Frustratingly, the second one marked the top of the June rally but today's rally has logged a higher high. In June RSI shot up to 67 while today's rally is only at 60 (which technically ought to be a bear turning point). Composite is at about the same level (red line) but note how we had the little dip in the June rally which is as yet missing in our current rally. Stochastics turned over in both rallies at the same point. Finally we had downsloped volume in both rallies. Note how the lowest volume in the June rally was the day before the high. My conclusion from this picture is that we are very close but there may be another day or two of upside or possibly a flatter top.

Next I want to compare our current rally with a rally that occurred in 2008 which I've blogged about before. Here is a 20day period chart (essentially a monthly):

I don't mean to imply here that we are heading into a 2008 type crash but I think the picture does indicate that the bottom is not in. The 50 period average (not 50 day average) plays a role in both bounces however in 2008 it was uptrending while today it is downtrending so hard to say if that really is a factor (note how that average called the flash crash!)

In both instances DeMark got to a 5 count. In 2008 it flipped. Let's see if November's is downward.

The RSI is the most striking however. The green line indicates the prior top in both rallies. The blue line indicates the bounce (notably at 40 which is technically still bull territory on the monthly). Then the red line was the end of the bounce in 2008. Today's rally is at that same point although granted a 4 point swing would still put us in that space.

The composite does not provide a good analogy however. We do have a pointed bottom but it is at a higher level and it would be difficult to see those trends match up without further upside. Very interesting to note in 2008 however how the composite "retest" was a good indicator that a bottom was almost in. If you look very, very closely you'll actually see that the composite has actually turned up for the first time at the end of the period that marked the very bottom.

What If I Am Wrong

This is the beginning of the 2010 rally. Steep just like today with gaps. One might have thought that the gap marked the top of the rally but it didn't. Certainly if we see the market begin to make slower, steadier uptrend then we have to consider the possibility that a new bull market has started (or at least an intermediate bull period).

That red line of course is the 200 day moving average and back in 2010 it was almost inevitable that the golden cross was coming. The gap across the 200 was a huge buy signal. Our current rally would need to double itself to get to the same point today although this is exactly what happened in 2008 when the market bounced at a point that corresponded with a gap fill and the 200 day!

Certainly looked like the market was heading back to a golden cross when it hit that "X" spot.