A reflex reversal for the stock market

I really didn't desire to post comments Wednesday night because I simply don't have a strong enough opinion about Thursday's prospects to desire being on record, but I'll pontificate for a moment and see what comes to me.

I have to confess the Bears have put themselves together a case. When I scanned 60 years of data looking for similar candle stick patterns as the last three days, I found zero matches. I don't recall that ever happening. As for what that entails, I suppose it depends on whether you are a glass half empty or glass half full individual. The problem comes from having three consecutive 4% candle bodies which reverse each other and are engulfed by the previous day's body. There just aren't any. I had my eye on Jan 20-22 of 2009, until the close and then lost it. So I'm in the dark for the time being from that perspective. Maybe, I'll come up with something before I get through rambling.

I have spent a bit of time over various periods of the last 20 years studying market cracks. It is my observation that no two patterns of 'crack recovery' are quite the same, but that they tend to have some very common characteristics. One can normally expect the bottom to genesis with a sharp capitulation day which is normally followed with a sharp one day reflex rally, similar to what we experienced on Monday and Tuesday. Day two off the recovery often involves a one day partial retracement of the initial reflex day which looked a lot like today until the last 30 minutes. You then begin to get zigzags with each subsequent rally phase lasting about twice as long as the previous, until you get a successful retest of the Low. But again, it is my perspective that when a true bottom is put in, you should not retest the Low two days later, but 10 to 30 days later. If we rally from here, I will look back and say, the psychological bottom was the intraday Low of 1101 or the Globex Low of 1066. It's probably a good opportunity to make money if you are on top of your game, which I felt I was until the last 30 minutes today. As he is prone to do, the S&P closed at the level which would create the most confusion.

If I were a Bear, I would be building my story around the case for extreme deflation. The double digit type which we experienced in 1919-1921, 1929-1933 and 1937-1938, which trumps all other indicators. I'm sure all tape measures were oversold at least a dozen times during that decade as well. My monetary models which I have revised a great deal over the last five years probably kept me from getting killed this month, as they have offset the bullishness of the intermediated tape models.

The tape indicators are at similar levels to those I got after Monday's close. I have all the bullish studies I have been showing you for the last week. 29-1 for tomorrow on the Volume analysis. On the intermediate outlook, I have the ADT1/ADT18 scan 24-1 one year from now. I believe technicals related to putting in a bottom are the key here but here is one Seasonal for you. The S&P is down 6.56% on the first three days of this week.

S&P Performance on Thursday
When Mon-Friday is down 3.45-9.45%

1 20020711 THU -6.93 0.70
2 20010920 THU -7.00 -3.11
3 20090219 THU -5.63 -1.17
4 20080925 THU -5.51 1.97
5 20080918 THU -7.61 3.21
6 20081120 THU -7.63 -6.71
7 20010222 THU -5.38 -0.20
8 20090115 THU -5.35 0.16
9 20010315 THU -5.22 0.39
10 20081113 THU -8.12 6.92
11 20080207 THU -4.94 0.79
12 20010405 THU -4.92 4.37
13 20090514 THU -4.88 1.04
14 20081023 THU -4.65 0.34
15 20000106 THU -4.57 0.10
16 20081002 THU -4.30 -4.03
17 20100701 THU -4.28 -0.32
18 20011101 THU -4.06 2.10
19 20090212 THU -4.01 0.17
20 20030123 THU -3.96 1.02
21 19991014 THU -3.78 -0.17
22 20090618 THU -3.75 0.84
23 20110317 THU -3.63 1.34
24 20001221 THU -3.61 0.80
25 19980903 THU -3.58 -0.83
26 20090423 THU -3.56 0.99
27 19980806 THU -3.50 0.76
28 20010531 THU -3.49 0.62
29 20000511 THU -3.46 1.79
30 20020207 THU -3.45 -0.31
20110811 THU -6.56 ?

#UP-DN = 21- 9
AVG%CHG= 0.45
MED%CHG= 0.66
1%MOVES= 9- 4

Wayne Whaley is a Systems Engineering graduate from Georgia Tech who takes an engineering approach to tape analysis. He is a registered CTA, co-owner of Witter & Lester and the 2010 MTA Charles Dow Award winner for research surveying various tape measures. For more insight see www.witterlester.com.

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