Will Bear Market Rally Continue or Stall Out?

An hour into yesterday's session after the markets had risen over 300 points I took a look at a 5-min chart and realized that we had moved almost a 1000 points in 2 trading hours dating back from 3pm est on Friday’s session. Now I know it’s been volatile lately, but this is the definition of “irrational exuberance.” Has anything changed that warrants that type of explosive move? This has bear market rally written all over it. It’s these types of oversold states that produce these snap back rallies that get everybody all excited that everything is going to be roses from here on out. Here are a few charts I’m watching to see if this rally can continue or stall out.

I really would have had more confidence in this rally if we wouldn’t have moved so far so fast. The trend is still down and we’ve really only moved back up to the triangle as seen above. If RSI can break through this trendline we may move further than I think.

Nobody can be surprised that the dollar finally caved, but a weak dollar doesn’t necessarily mean a strong market. In fact, the dollar and the markets used to have a more direct relationship than recent days. You can short the dollar via UUP.

This is one chart to watch because if this turns up from here, it appears to be forming a cup with handle pattern with is very bullish and would be very bad for the overall market. For this pattern to play out it almost has to immediately turn up from here. A lot of people are sticking a fork in the Vix here, but I’m not so sure it’s best days are behind it.

Comments

[drbob66:]

"You can short the dollar via UUP."

UUP is a BULLISH dollar ETF...I think you meant UDN.

2008 Nov 25 07:57 AM

[Maximus:]

So what is the answer to the question posed by the healine?

2008 Nov 25 08:11 AM

[adan:]

udn to short, thanks drbob66

2008 Nov 25 09:12 AM

[xsuddensam:]

Sucker's rally!

2008 Nov 25 09:17 AM

[subprimeswami:]

If the Vix drops and the dow can get past 9000 then we could be past bottom of the bear. otherwise forget it.

2008 Nov 25 09:59 AM

[disaster2008:]

Too soon for too much of a sustained rally, even though, based on long-term future cash flows, the market is way oversold. What happens in the next 6 weeks will mainly depend on the news. if Obama continues to take center stage to calm the markets and restore confidence in the face of otherwise bad news, the rally could continue into early December. But it seems likely another sell-off will occur before the end of the year. That would probably be the time to buy and hold since the market could take off with Obama taking office and with 4th quarter earnings probably on the upside (since expectations are so low) in the January-February timeframe.

2008 Nov 25 12:09 PM

[CAPT GW:]

There is a lot of smart money feeling bullish on the Obama Administration. And the normal rule of thumb is to buy when others are afraid, so last Thursday would have marked the day to buy as the VIX suggested record levels of fear. (But what about the role rational fear? On Thursday, it looked as if Citi, GM and any leveraged lender could be on the ropes. Was that irrational fear or irrational? And does record levels of fear FOR A GOOD REASON -- namely that we have a lame-duck administration with a POTUS, who, despite his Harvard MBA, has little comprehension of the profoundly risky situation over which he presides -- mean that the market should have repriced risk accordingly, therefore that buying on thursday would have been a fool's errand?

And is the market irrationally exuberant in factoring in the positive prospects under a new administratio when the new administration is 2 months from taking the reins?

2008 Nov 25 02:19 PM