Stock market gains suggest bear market rally

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1216.01

+61.78

+5.35%

Dow Jones Industrials

11509.09

+516.96

+4.70%

NASDAQ Composite

2622.31

+154.32

+6.25%

Value Line Arithmetic Index

2631.30

+137.72

+5.55%

Minor Cycle
(Short-term trend lasting days to a few weeks)
Positive

Intermediate Cycle
(Medium trend lasting weeks to several months)
Negative / Neutral

Major Cycle
(Long-term trend lasting several months to years)
Neutral / Negative

Last week we received an email from a reader curious as to why we separate our Market Overview section into two parts – “What We Know” and “What We Think.”

The simplest answer is that “What We Know” is our “Objective” take on the market including the latest price levels, trading volume, the status of Momentum on the various cycles, our Call/Put Dollar Value Flow Line (CPFL), the Most Actives Advance Decline/Line (MAAD), and so on.

On the other hand, “What We Think” is our “Subjective” overview of what all the objective inputs imply. “Was the break by the S&P above its 10-day Price Channel last week near 1205 a precursor to further gains toward major resistance at 1255-1270?” Or not. “Are we in the early stages of a new bear market?” Or not. “Was the reversal of 28 days of negative CPFL Dollar Value numbers last Tuesday a bullish sign?” Or not.

a·nal·y·sis:

  1. A detailed examination and evaluation of the elements or structure of something, typically as a basis for discussion, interpretation, or the best course of action.
  2. The process of separating something into its constituent elements.

As a consequence of the separation, the objective and subjective are combined into our analytical opinion, our analysis. Thus, because our job here is to “analyze” the status of the stock market at any given point in time, we must evaluate ALL components, objective AND subjective, to derive a point-of-view. While some might like us to create an executable methodology totally devoid of any “opinion,” such an strategy smacks of Hal unrestrained, the computer brain in the 1968 classic, “2001: A Space Odyssey.”

Simply put, we tend to think, there’s that word again, that human input is needed to offset, even restrain, the tendencies that could surface in a world that could become too “objective” because of computers. In other words, the collation of inputs in the pursuit of a purely objective goal is valid, especially in the financial markets, but at some point someone has to make sense of the outputs.

Market Overview – What We Know:

  • Further market gains Friday pushed S&P above statistical resistance at upper edge of 10-day Price Channel (1204-1205).
  • Next level of minor resistance holds at August 31 intraday high (1230.71--S&P 500).
  • Trading volume in S&P rose Friday by nearly 23%.
  • Short-term Momentum and Trading Oscillators remain positive.
  • Cumulative Volume in S&P Emini has moved to new short-term high and best level since short-term rally began after early August lows. Given extent of decline in Emini CV in recent decline, however, Emini CV nonetheless remains net weaker than price.
  • Rally since early August lows continues to have “appearance” of classic reflex rally within context of Intermediate Cycle negative. Strength above 1230.71 would leave major resistance at 1255-1270 and Head and Shoulders “Neckline” recently fractured on downside.
  • Resolution of short-term bear flag pattern would require downside break of defined trendline stretching back to August lows.
  • Daily CPFL was last moving higher after terminating 28 days of negativity via last Tuesday’s positive reversal.
  • MAAD moved higher last Friday and on the week.

Market Overview – What We Think:

  • Further price improvement in bellwether indexes last Friday on better Cumulative Volume numbers, especially in S&P Emini, could be an indication S&P has completed “B” leg of A-B-C correction from August 31 (1230.71) through September 12 low (1136.07).
  • If more strength carries S&P back above 1230.71, we could see “C” leg rally to 1255-1270 and Head and Shoulders “Neckline.”
  • Break above 10-Day Price Channel at 1204-1205 last week gives credence to potential for further positive rebounding.
  • We nonetheless continue to think price action since August lows is consistent with bear move retracement action.
  • We continue to think its unlikely major resistance at “Neckline” level of S&P 500 (1255-1270) will be overcome before short-term trend reverses to negative.
  • Breaking of losing streak Wednesday in CPFL after 28 days of net negativity last Tuesday is favorable sign, but positive change has probably come in the latter stages of short-term rally that is into its end game.
  • If more selling develops, its likely Momentum on long-term trend will turn negative to confirm a reversal of larger bull move in effect since March 2009.

A philosopher once said that “The human mind is a wonderful servant, but a terrible master.” Same for computers that are mere tools. To presume that human thought is somehow inferior to “machine thought” because humans can tend toward the subjective could be a fallacious argument since it was humans who designed computers in the first place. Ultimately, while the computer may be quicker, can it be “smarter”? While we might be accused of being a Luddite, we will continue to “analyze,” at least until Hal proves we can’t, or shouldn’t.

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