Tuesday, October 28, 2008

Big up day #837

There are two reasons not to get too excited about today's nearly 11% gain in the S&P 500 index.

First, huge up days like this are not healthy for the market in the long run, as has been made painfully obvious several times earlier this year.

Second, the breakout above the declining tops line is tiny at best, and could be just another head-fake.

8 comments:

zoud said...

Totally agree that it could very well be just another head fake.

Out of curiosity what value would the S&P's high have to surpass tomorrow in order for your methodology to consider the previous trend line broken? Or is it more a matter of multiple days of staying above the trend line? Or a little of both?

Jody said...

It's complicated. If the market climbs decisively in the next two days then it will be an official breakout; however two or three big up days in a row would eventually be followed by a significant multi-day slump, regardless of the previous trends.

A gradual climb through the upper resistance line would be more definitive, because gradual rallies are far more sustainable.

adventurerneil said...

Hey Jody,

Saw this buyback post from the top CAPS player tonight and thought of you: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=103843&t=01004034443672390362

Jody said...

Yes, in fact that caps player was inspired by me, as described in this January post.

Dan said...

Jody,

The market has broken to the upside of the trend line you've drawn.

What are your thoughts on this "rally"

TIA

Dan said...

Jody,
I haven't had time to overlay the 1929 DOW to the present recently but what we are seeing now if I recall correctly looks pretty similiar (~ Oct 1929). I am not suggesting we will see another ~50%drop from here as was in 1929, particularly due to all the stimulus that's been put in the "pot" - that's not to say that government intervention is heathly for a "free market" either - may end up doing just the opposite of what most free market fans would hope for. Your thoughts?

Jody said...

Yes, intra-day the market has broken the trend line, but it's still refusing to make a convincing *close* there. I'm not going to try to read any more into the data what the market is giving me, so I'm still in wait-and-see mode.

Keep in mind that I still won't go long in a rally here. A rally would simply confirm that I don't want to get into a bear fund at this point.

Jody said...

Now that the market has passed below Dow 8500/S&P 940 I don't have a new bear market bottom forecast to replace it with. The seasonal hurricane forecast has served it's purpose, and we're going to have to watch the radar and satellite images for the rest of the bear market.

I see two extreme possibilities from here:

1) The market hangs around this level for months, forming a bottom, and the next bull market starts slowly after that. (ala 1987)

2) The market rallies from here, drawing in optimists, and then falls right back down to these levels or lower. (1929-30, 2002)