Stocks rallied for a second straight day - on both sides of a holiday weekend - catching many investors off-guard. The Dow gained 223-points, closing at the highs of the day despite the price of oil reversing negatively and closing near its lows. The market leaders, Transports and small caps, led on the upside with each gaining well over 2% on the day.
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The reason bear market rallies are so explosive is because of the large amount of cash on the sidelines that is fuel for a rally, and once the rebound starts, that fuel ignites and triggers more buying out of fear of missing out on gains. For weeks the relief rallies were less than impressive and quickly reversed so investors do not trust them, but once the indices are sufficiently oversold and investors excessively bearish, it is a recipe for the explosion.
Often these rallies last longer than many expect, even those who were anticipating a relief rally. The trouble is, just when everybody trusts it, the bear market can often bite back and trap the most unsuspecting victims it can. It is a very tough dance. If you play it right, you can do very well. If you're wrong, the bites can leave a mark. Will it last days, weeks, or is this a true bottom? We all have our predictions, but only time will tell.
The SPY (S&P 500 Index / C-Fund) gapped open on Tuesday after the long weekend and by the close it had positioned itself above both the 20-day EMA and the 2016 descending resistance line. Volume has been light during the two-day rally which means that there isn't a lot of trust out there, but also it's likely the big money hasn't made a move yet. That could either turn out to be a good thing if that money starts getting put to work, or a bad thing if the buying dries up. The 50-day EMA and the next resistance line are the next possible upside targets. The PMO indicator has now moved above its moving average for a second time.
The Dow Completion Index (small caps / S-Fund) led the way with a 2.4% gain. It opened a new gap (red) and filled the open gap from last week (blue), and is already bumping up against resistance.
The price of oil could not hold early gains and it reversed down after testing the top of its descending trading channel. Has the stock market officially decoupled from the price of oil?
The Dow Transportation Index closed above the 50-day EMA for the first time all year, but that double dose of resistance near 7200 could be a tough test in a bear market.
The EFA (EAFE Index / I-fund) gapped up and is posting similar formations as the small caps. Resistance is being tested now after a lower low and a reversal.
The High Yield Bond Funds may be a concern as they did not rally yesterday. If there is a positive here it is the large falling wedge formation, which tend to break to the upside.
Today is trading day number 12 in February, and historically that has begun a 5-day rough patch for stocks. But this year has not followed the historical seasonality map all that much so it may not be a factor with stocks already down sharply this year.
Chart provided courtesy of www.sentimentrader.com
The AGG (bonds / F-fund) was down and is now testing the bottom of the rising trading channel now. This will be a test for both stocks and bonds. If that rising support holds, we could see stocks resume their downward trend, but if the support breaks it could mean stocks have more room to rebound.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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