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What a Late Day Rally Really Means

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY)

I happened to have the TV on, which is rare, and happened to have on Cramer, which is even more rare. He started off his segment by talking about the very same topic I had planned for today. Naturally my ears perked up. I didn't catch the entire bit verbatim but I think i got the jist. "Late day market rallies indicated that we're in a real bull market that's being held up because of positive news."

Apparently if we pump the air waves full of positive news, markets will rally.
The inverse would mean that if we pumped them full of negative news, they will decline.

But is this true?

No.

Here's why...

We know this to be not true for a million reasons, but the one most easily grasped is that back in March of 2009 and beyond we were inundated with negative news, yet asset prices rose. I'm also sure you've seen situations where your favorite stock reported good earnings yet the price sank like a ship.

"Oh but it's already priced in..."

Right....

Prices move based on supply and demand.

Prices only move on supply and demand!

What a late day rally REALLY means:
The next time you see a late day rally, pay close attention to the volume. When we see AM sell offs, they are occurring on consistent or increasing volume.

Until something happens...

Volume suddenly drops.

The volume drop that you are seeing after declining prices is quite literally the supply running out, dropping off, declining, sellers leaving, whatever you want to call it. The net result is the SAME. Supply has run dry!

When surpluses becomes shortages, we have increasing demand and increasing prices that naturally follow.

This is precisely how we get late day rallies. This is also precisely why we have "no volume" rallies that people think is a sign of weakness.

Price APPRECIATION on low volume is NOT weakness.

The FAILURE of price to appreciate on low volume IS

View exactly what this looks like on the BIDHITTER blog