Not Afraid to Change

So here we are on the New Jersey Shore in preparation for a weekend birthday celebration for two of our kids at a place on the beach without internet. But lo and behold, somebody someplace has an unsecured signal, so here we are. That, plus an eye-opening surge by the indexes, virtually demands a post (despite the editorial warning to the contrary in Wednesday’s blog).

No doubt about it, Thursday was a good day. The S&P rallied 2.3% to move decisively through resistance at 956. It was not a 9:1 day, but breadth and volume ratios were very solid. And, unlike many of the recent up days, total volume was significantly higher than the previous day’s total.

Over a month ago (July 14), we observed that the evidence for a rally to or through June’s 956 high had strengthened. We felt that such a rally would be a short term event, suitable only for more aggressive traders. Granted, even more conservative folks wish they were all over this rally, but our body of evidence still suggests that this is a short term “last gasp” in the context of a deteriorating intermediate trend.

We are not afraid to admit mistakes, but the evidence is not there. We have made the case that new recovery highs would result in more divergences. While the divergence are not as many as we thought, they are there. For example, Thursday’s high for the S&P was 2.4% above June’s high, but over half of the stocks in the index are at least 2.4% below their high of the past 100 days. This suggests narrow participation.

Thus, we continue to view the rally from the early July low is a short term event. We view it as an ending of a mature bear market rally pattern. It is not the beginning of a new bull trend. If the evidence changes, so will we. The evidence has not changed, so we are staying the “bear market rally” course.

The rally through 956 now opens the door for a challenge of chart and Fibonacci resistance in the 1007-1048 range.

The recent strength means that 870-869 is now first support. It may be tactical support, but – for now – we will continue to use 879-866 as tactical support. If that range is violated, we would be inclined to look for further weakness toward at least 812-777.