Thursday, November 13, 2008

A Very Bullish Intraday Reversal On Very Strong Volume Hints To A Possible Start Of A New Rally Or A Bear Market Bounce; Either Way Bulls Will Take It

There is no doubt that today was nothing but very special. I must admit when we were down over 4% on all the indexes, it looked very bearish and I have to admit it was a little depressing. Even though I never give up on the market, I have been watching this market almost from the start of the day to the end of the day every day since the election. And to be honest, the selling, even though it was profitable by far, was getting old. I needed a small break and decided to catch up on some sleep.

When I woke up about 1 1/2 hours later there was still 45 minutes left in the session and I was an extremely happy person to see that the red that has been such a part of this market all year long was finally green in a significant way. Not only was it green but I watched as it steadily rose higher and higher until finally the bell rang. When that bell rang it was obvious in my chat room, despite the gains everyone has made in this bear, everyone was very happy that we could put in such a huge reversal with the indexes going from down 4%+ to up 6%+. The Russell 2000 even staged a very impressive 8.49% gain.

The other great news about this rally was that for the first time since the January to March attempt of a rally I had more than just 10 stocks in my main long scan. In fact I had 29 which was the highest amount by far since the downtrend was started in earnest. That is when I began shorting and continued shorting. However, right now, I am more than happy to stop, raise more cash, and wait for a possible move higher.

The one thing that should be taken into consideration is that out of my 33 shorts all 33 are still below their 50 day moving averages. Since almost all of these show me gains, and since I run a very disciplined portfolio, I can not cover the full positions. However, if the stock had a reversal, the volume was large, and you can see BOP going green, you can be sure that I covered quite a lot and am happy with the profits I can use to either go long or short anything that shows up in my scans in the future.

I also think it is very important to remind everyone that today is ONLY day one of a new rally attempt. On the DJIA the indexes price action has managed to remain above recent support. But on every other index (SP 600, Nasdaq, Nasdaq 100, SP 500) the price was able to hit new 52-week lows today before staging one beautiful reversal.

Remember that no one day does a new bull market make. We must wait for confirmation via a follow-through day and we must not see the index produce any more distribution days. If the indexes give off a heavier volume selloff tomorrow then the bullish action today would be less meaningful. However a few days of low volume pullbacks followed by heavier volume accumulation would put the market in an uptrend.

Just remember not all follow-through days lead to a new bull market but no bull market has EVER started without a follow-through day. In other words don't believe every on will work. Instead look at the volume and price move on the indexes. And most importantly look around to see if the leading stocks are coming from the top quartile of the industry groups or the bottom. If it is the bottom, chances are it is just a bounce that will fail in the future. If it is the creme of the crop, then all engines are usually a go.

One index that I monitor that is in a follow-through day and has since had three days of strong accumulation and price action is China (SSEC-X on Telechart). The Shanghai index had a 3.7% rally last night and had very heavy volume to come with it (look in the Gold Forums for the chart; posted by MarketSpeculator). This price and volume action since the previous lows that also had accumulation looks very good with the low volume that preceded the recent price and volume action.

The thing to remember though is that we are coming from a very nasty downtrend with the Chinese stock market down at one point 72% and the Nasdaq down at one point 50% year-to-date. These kind of losses in just a year's time has made a lot of chart patterns very ugly and it is going to take more than just one move higher on strong volume. The accumulation we see in China must move the market higher and lead to another lower volume pullback that holds the lows. This must be followed by another follow-through day. If this happens I am very confident that we can come out of this sooner than later.

However, if that does not happen and the United States stock market does not basically do a repeat of what it did in 2002 to 2003 as it build upon higher highs before becoming a clear new bull market in March 2003 it is probably going to be bounce that is followed by stocks hitting past resistance levels and failing.

If that is what is going to happen, I will be more than happy to take a few longs on the way up if I can while the trend is up and then reverse my longs into shorts when that resistance and failure comes into play. The best thing that could happen is that I have to cover the rest of my remaining shorts and start to rebuild my IBD watchlist because calm price action, heavy volume, and green BOP charts start showing up in my scans. I sure miss those but I know they will come back. Heck we even have one now that has made us some money as we have taken some profits and still hold some as the trend is up. If you don't know QCOR, then you aren't following the market close enough.

I am going to wrap it up here and welcome you to watch the video so you can visually see the market and its price and volume action. Gold and Platinum members can go to the Gold Forums now and watch Part One and Part Two in a full size version.

Have a great day/afternoon/evening/night. :)

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