Somebody please call Gary Savage and ask him where he keeps his oracle locked up. In yesterday's e-mail to subscribers, he called for a bullish hammer day, also known as a 2b reversal, and that's exactly what we got. In a big way. The massive rally scenario hoped for played out as stocks dove into territory of dark despair and then staged a phenomenal surge to close 11% off the day's low. Can this rally extend? I believe the answer is "yes" for several reasons, not the least of which is my view on the psychology underlying all this action. My midday post about Silver Wheaton was quite timely as I described how I felt compelled to fade the prevailing gloomy mood. I believe the retail crowd finally gave up on the rally idea as we sank to new bear market lows. The capitulation is shown along with the requisite spike in volume:
After two false starts suffered out of October, I'm willing to bet that the retail crowd is too despondent to chase another rally, and this attitude is exactly what will keep it going this time around. Oh, eventually they will chase the rally... at the tail end. By early spring expect to hear mindless chatter about how 2008 was another 1998. The Fed saved the day once again with the printing presses, and the economy will be sure to follow in a few months.
When you observe such nonsense, do yourself a favor and sell those folks what they want. The other side of this rally is going to unfold as the ugliest market our generation... or the next... will experience. It will be brutal, but not in the sense of October 2008 brutal. The market will simply roll over one day, very calmly and uneventfully, and just keep going. People will load up, thinking another correction has ensued, but the market will just keep falling, month after month. The action will be quite monotonous, offering very little to swing traders, and will likely carry us well beyond the recent lows.
Here's another reason for this rally to persist:
A correction in the dollar is exactly what the market needs to fuel a mid-term rally, and the technicals are quite ripe for a dollar slump.
So, we've got some great signs in place. How about confidence builders?
The market needs to display its fortitude by confirming the reversal with solid follow-thru. We need to rally fairly quickly to a close above the last swing high. Finally, the first downturn must take a consolidative form. So, we've still got some work ahead of us. Let's enjoy the show!