Counter-trend Rally possible, but how far will it take the markets?

Every bear market move to the downside has a bear market rally. Some opine that the 83% upside since the March, 2009 low had been nothing but a bear market counter-trend rally and now the original downtrend is continuing. I tend to agree with this opinion.

So it's not a surprise that we might get a minor counter-trend rally after the recent declines. But it's going to need to be more powerful to reverse the triple decline of the major moving averages.

As we can see, there's a possibility of the S&P 500 moving back up to 1080 before it comes into maximum resistance at the 20, 50 and 200 Day MA. But that last move downward left a bunch of people who had been buying the S&P for 3 weeks and were stuck in their positions after that one day plummet. Now they are hoping for a rally to bail them out, so there's expectation of major selling at the 1060 range.

S&P 500 Daily

The Russell 2000 is also coming into a similar band of resistance. It's also lined up nicely with it's downward channel, so if it manages to move higher tomorrow, it will break that down channel and rally up to 620.

Russell 2000 daily

Ron at Chart Pattern Trader has some good comments on using Moving Averages, especially when they are all in alignment in the same direction.

MA alignments

Now.. what's amazing is that we had lousy data today, but the market fell, then rallied to close positive. Some are taking that as a sign of selling fatigue and that's a distinct possibility. It could also be that a short squeeze was forced by jacking the futures, in order to give the longs a final chance to distribute at higher prices before the final plunge to lower lows (breaking the neckline of the Head & Shoulders formation that I've been discussing and which seems to be gaining acceptance by market technicians.

Tomorrow and Friday will be telling indications as we get the jobs report and on Friday, revised GDP. If jobs data is better than last week's 500K new unemployment filings, it might provide a short-term impetus for continuing the rally. Obviously many are hoping that last week was an aberration caused by Census workers being laid off. If tomorrow proves otherwise, it could create that impetus that takes us below the neckline.

What I'm wondering is whether these extended unemployment benefits which were passed will require folks to re-apply, therefore adding to unemployment claims. I believe that's the case and that could drive unemployment numbers up substantially as folks who had fallen off the UE rolls, reenter and get counted along with the newly unemployed.

In sum, it's about jobs, jobs, jobs.. which equal consumer demand, which impacts economic performance and housing. And it's about preserving job skills, which decline during long periods of playing Xbox and thumb twiddling.

And along those lines, here's something I read that I feel justifies being re-posted here:

Uncle Scam

Anyone reading that has to be amazed that we have much economic and jobs growth at all.

Best of luck through the remainder of this week!!

Scrutinizer

Market telling us: "May You Catch A Thousand Falling Knives"

I really hate to have such a negative attitude towards the market. However, (apparently) like so many other investors, the STILL UNEXPLAINED "Flash Crash convinced me that this market was hopelessly rigged by a Financial equivalent of "Skynet" (ala, "Terminator"), with it's High Frequency Trading "black box" computers, and those financial WMDs known as Credit Default Swaps, that it just doesn't make sense to anything but daytrade, primarily on the short side (betting the market goes down).

And now.. it seems that the predictions we've been hearing are coming true. As the US economy is forcibly weaned off the misspent, multi-trillion dollar government stimulus, we're coming down like a Heroin addict forced to go "cold turkey" in an unpadded cell.

Today "news" was the horrible existing home sales data, fully 30% beneath expectations, as well as hitting a 15 year low. Combine that with a 12 month supply of foreclosed and REO properties over-hanging the market, and it's little wonder there's little incentive for people to buy during what is normally the height of the summer buying season. Folks fully expect home values to come down even more. I know this personally, as I'm in the market for some investment property to deploy capital from my father's estate, since CDs are paying a pathetic return. But buying property only to see it decline in value by a further 10-20% means that it takes at least a couple of years of rental profit to break even.

Things may get much worse as we move into fall and winter, never a good time to sell houses given inclement weather issues.

And tomorrow we get durable goods and NEW home sales, neither of which should be positive given today's numbers. Durable goods are generally items that people either utilize credit to obtain since they often amortize them over the period of use. Household consumer durables, such as appliances, also make up this data, and if fewer homes are being sold and built, fewer appliances are being purchased.

And ultimately, we have the revised GDP data from last quarter, which has already been revised downward once. Expectations are for another downward revision, which calls into question the value of the original data and whether it was "spiked" to create the impression of greater growth than actually occurred. It also calls into question the value of governmental stimulus, since we jacked up the US national debt by approx 10%, yet obtained even less GDP growth than the perceived 3%. That's like taking a $1000 cash advance on your credit card, and putting a couple of hundred bucks into you pocket and calling it "income". I understand the rational for a stimulus, but it was incompetently misspent and failed to achieve an return on investment (ROI) for the US taxpayer. Little wonder there's very little enthusiasm for a repeat.

Btw, again here's the link I use for the week's economic data reports. It's worth bookmarking if you're invested in this market.

As for videos tonight, Chart Pattern Trader has a very good video that all readers should watch.

And of course, Christian at PSA is telling us all to stay short as further selling is to be expected. He makes a compelling case for this via the divergences he's seeing in the Stochastics and price action. Always believe the Stochastics and RSI over actual market price.

I'm currently long TZA and VXX (VIX ETF).. I was stupid and chased TZA today as I sold out my position overnight and it ran up hard overnight, so I'm a bit underwater, but I think the market action will make me profitable in coming days.

I just don't see any reason to go long here, until we reach some level of identifiable support and then only for a bounce.

And btw, if you didn't read this article from my previous post, it's worth posting again. It discusses proposed accounting changes regarding corporate lease accounting. This could have a MAJOR IMPACT on future earnings for S&P companies, forcing a downward revision on book values and increasing liabilities.

I also need to do an post on how FASB "mark to market" accounting played a role in crashing the Securitized Mortgage markets. It's almost as if there is a concerted effort by the FASB to pull the rug out from under the current Corporate accounting rules. Makes one wonder if those original changes were meant to set corporate accounting up for a future fall by permitting them to take what should be consider liabilities, off their books.. only to make them add them again at some future date.

Oh.. and btw, here's a GREAT INTERVIEW with Former Fed Governor Mishkin, who apparently wrote a glowing report about Iceland just months before that country's financial system collapsed. Turned out he failed to mention he was paid $124,000 to write that report by the Icelandic Chamber of Commerce. This represents a clear (and all too common) conflict of interest. And it's very similar to the arrangement the Ratings Agencies had with the Investment Banks when they were paid to give AAA ratings to toxic sub-prime mortgage securities.

It's really amusing to watch him fumble over the interviewers very pointed questions. I really loved the part where he claimed that the title change was a "typo"...LOL!!

He should be investigated and fined/arrested, for failing to disclose such a glaring conflict of interest.

It's crap like this that undermines investor confidence in the public markets and is causing them to boycott them.

Have a good one!!

Scrutinizer