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November 29, 2008

Bear Market Rally ABCs

To declare that the upcoming week is crucial to the development of a mid-term rally would be more than just a modest understatement. The Thanksgiving week rally has brought the S&P 500 to kiss the underside of the downtrend line defined by the crash.

index chart

This kiss was anticipated in last weekend's post, along with three possible paths the market would take from this intersection. Here's the chart:

index chart

And here is the text that accompanied the chart:

We are witnessing a common ending pattern where price forms two loops under a trend line. This pattern is typically followed by a breakout which tests the trend line in one of two ways. In scenario "A" we get a crawl beneath the line as it is approached, followed by a runaway move higher (most common). Scenario "B" offers a strong impulse through the trend line followed by a backtest to shake out weak hands. The least common outcome shown as scenario "C" is a failure of the pattern and results in a rapid decline. This last outcome would constitute the disaster scenario that takes the SPX down to the 600-650 zone.

I still anticipate scenario "A" as the most likely outcome, but you won't hear me complaining if we get "B" instead. I am positioned for a big rally. I am therefore on red alert for a high volume drop away from the trend line because if scenario "C" plays out, its speed will surprise bulls and bears alike. For the sake of our futures, we should hope that "A" or "B" play out here as these paths will lead to just a depression followed by a period of nasty inflation and ultimately a recovery. If scenario "C" unfolds, I think we're facing deeper depths: social chaos, wars, supply shortages, and vast losses of freedoms.

Returning to pleasantries, keep an eye on the the buck for a sign of what the immediate future holds:

dollar chart

Positive divergences in some key indicators are also encouraging:

indicator chart

indicator chart

indicator chart

Speaking of two loops and a trendline crawl, check out silver:

silver chart

Stay on your toes folks. The markets are primed for explosive moves.

 

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