On Thursday, the S&P 500 closed above the 20-day moving average at 745.10 for the first time since Feb. 9. And it closed above the resistance line drawn from the November low at 741.02 for the first time since Feb. 13.Volume for each of the days of higher prices increased to more than 1.8 billion shares on the NYSE, and that is a higher-than-average volume for any month this year (1.6 billion average). But volume has been picking up since the breakdown on Feb. 27 at S&P 740 when more than 2 billion shares traded.
With a reflex rally now underway, the question is: "How far can it go?"
The close on Thursday at S&P 500 750.74 poked prices into the resistance zone from 740 to 800, where the index encountered the first solid pocket of potential selling at 742-780.
Now with momentum, the Moving Average Convergence/Divergence (MACD), and the CBOE Volatility Index (VIX) indicating that the rally should continue, that pocket is a good test for the bulls. Average volume at that level was about 1.9 billion shares, which is just about what the NYSE has produced daily in each of the last three days.
But even if the current drive is successful, after that there is the enormous overhead created during four months from 800 to 900. If buyers are able to surmount the immediate obstacles and establish a base, the chances of a sustained move are slim and the likelihood of an extended back-and-forth type of trading are very high.
This rally came off of the most oversold numbers seen in a long time. Some made new records, such as the American Association of Individual Investors (AAII) bearish reading of more than 70.27% on March 5. The latest AAII bearish number on Wednesday was 54.47%, which is the lowest in four weeks. In other words, the public is becoming less bearish.
And it is no wonder that the public is getting on board. Seldom have I seen such cheerleading from the TV financial press. You may remember that just a couple of weeks ago, they started whooping it up only to crawl back dejected when prices broke through the double bottom at 740 on the S&P 500.
The evidence, so far, is that the rally is a bear reflex run-up based on what was a deeply sold-off market. Like a coiled spring, energy is released when the slightest bit of pressure is eased. And that's what happened this week with the release of better earnings for some of the beaten-down banks and better retail sales.
But the chances are high that the spring is weak and, after a short run, the bear will still be with us.
While we have this momentum on our side, a stock to watch is Intel (NASDAQ: INTC), my trade of the day. It appears to be poised for a breakout after forming a solid base at $12.
Sam Collins is a contributor to OptionsZone.com.
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Reader Comments (Page 1 of 1)
3-13-2009 @ 1:04PM
Iridium said...
The problem I have is that we more or less let a broken system continue to operate. We didn't fix a single thing.
Every deadbeat CEO got rewarded and terrible companies recieved funds to keep operating.
It has been a huge backscratching session that stole trillions from middle class workers to keep corruption running at full tilt.
If we do have a recovery it will be another false recovery like the bull market after the dotcom crash. They are even talking about suspending mark to market for a little while.
We are going to go through all of this again because nobody learned a thing and nobody was punished.
We may even get a huge oil rally again to $200 a barrel. Everything is wrong and nothing is right, yet analysts and wall street say everything will be great.
Its like someone waved a magic wand and all of the core problems with big business have gone away. Every real fundamental is terrible, WAKE UP PEOPLE.
3-13-2009 @ 11:03PM
Robert Ferguson said...
I completely agree. I would expect choppy trading for several weeks followed by a retest of this floor. If this low is sustained I would be encouraged but hesitant until I saw a sustained up trend.