Ian Woodward's Investing Blog

This Bear Market Rally has Centipede Legs

Despite the gloom and doom we experienced just 6 weeks ago, we have been able to crawl out of a hole slowly but surely to gain over 30% from the Base Low of 667 on the S&P 500.  This is indeed a comforting cushion should we go down in the ensuing correction which is expected to arrive soon if not sooner.   This Bear Market Rally has Centipede Legs as we hop along on our Pogo Sticks:

Centipede

1.  We are into 2nd qtr. Earnings Reporting, and that invariably dictates a sell off

2.  We are two weeks away from May, which suggests the adage “Go Away in May”

3.  We are in a six week rally and the best  is 8 weeks on the way down from the top

On the other hand all the palaver of the G20 summit is behind us and we experienced five straight weeks of S&P 500 gains, where I last showed you the statistics for  the first four weeks with over 23% up and 27 such occasions over the years since 1929.  Yes, of course it was somewhat with tongue in cheek, but we needed some positive news against all the gloom and doom around us, and as it happened it turned out to be favorable…who says that History doesn’t repeat itself?

Given that we then eked out a fifth week of gains, I might as well continue the theme and show you what Past History might suggest for the following three weeks.  Note that the chart below has its stake in the ground at four weeks and then showed the next week and four weeks later, so that we now have only three weeks more to go to meet the expected range of numbers I have circled in the chart below:

bear chart

Now to blend Theory with Practice, we should stare at the current Support and Resistance lines that most Technicians would lay on the current S&P 500 chart pattern.  I have long before now made the point that 840, 940 and 1000 were the important lines in the sand on the way up.  Since 840 is now behind us, I raised the bar to 875, 940 and 1000 as shown on the chart below:

S and P

As I am sure you will recall, all great rallies rise above the 17-dma, and  given that it has pierced up through the 50-dma, when they fail the fallback is to that level.  The Line where key decisions must be made is at 790 but certainly at 780 which was the bottom of the 1st leg of the Saw Tooth Plan.  Net-net, the Market  has played right into our hands and there are no excuses for type 3 swing traders who have been nibbling.   All these numbers are within the ballpark of the Past History Chart above!  Enjoy.

Best Regards, Ian.

2 Responses to “This Bear Market Rally has Centipede Legs”

  1. KevinL Says:

    Ian,

    Thanks for the timely post. So you are not concerned about the volume falling off or the slope of the price line starting to flatten out? Of course, if I stare hard enough, I can see the 50 DMA has just turned up…, but we are a long way from penetrating the long-term DTL.

  2. ian Says:

    Hi Kevin: Sure, we must always be concerned when a rally is a trifle long in the tooth, and it begins to curl over with volume drying up. The Newsletter covered all the bases on three different scenarios, so I did not want to be redundant on the “if’s, and’s and but’s”.

    But then again all great climbers must pause to refresh, so that a little droopiness is sometimes good before a rally gets a second wind. Please also realize that last week was a short week with many taking a well deserved holiday in Hawaii or the Hamptons.

    Maybe I should have spent more time on the downside to give a balanced view on where my head is at. I did that in the Newsletter.

    The way to look at the situation is that any point higher than we are at now is gravy, and provides more assurance that we can withstand greater than an 8% correction the higher we go. My sites are only on the “High Target” as I mentioned on the bottom of the chart, so that 875 only gets us to 31% up from the Base Low, which is hardly reaching for the fences as the other two targets suggest. It is most unlikely that the DTL 405 Freeway line which is the Highest Target of over 1000 will be reached on this round without a correction.

    The more important point is what is the ultimate extent of the cushion on the way down, and can it portend to produce an INVERSE Head and Shoulders when all is said and done to set us up for the second true leg of the move back to recovery. If this rally peters out today, the best we can hope for is to arrest the drop to 8% down to maintain an intact Saw Tooth Plan.

    One last point in the scheme of things is the question of defining psychological barriers:

    a. 800 on the S&P is #1. We need 875 to hold an 8% drop above that.
    b. 8% down is #2, which is the 77% rule of all S&P 500 corrections.
    c. 780 is #3 to hold the Saw Tooth alive and to give any hope of an Inverse Head and Shoulders set up for the future. All the talking heads will be covering that point if and when it arrives.

    After that, throw in the towel and run for the hills.

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