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December 8, 2008

Perfectly Executed

I'm going to keep it short and chart-free tonight since there is not much new to discuss. We pretty much got exactly what we wanted out of today's session: a gap higher followed by further strength and then a little give-back in the last half hour. Why, you may ask, is the late give-back important? Because it betrays skepticism about the rally. We have been conditioned by two large rally failures to expect another one. Remember one of my market psychology tenants: the market gods will very often condition traders by repeating a pattern twice and then turning the screw when everyone expects the same result on round three.

So I now expect to see the effects of people who sold into the initial stage of this rally chasing the market higher. First, we set the trap by getting "unexpected" strength, followed by another surge as people jump back into their positions. The trap snaps shut when we get another scary pull-back that chases out late... and thereby weak... hands. All these antics should be manifested by a run to SPX 975 or so within a couple of days. I wouldn't even be surprised to see the market get there tomorrow.

With our close above SPX 898, we have a new higher high in place, which is another positive sign of trend change. Therefore any close back below that level would be a sign of trouble.


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