Here is an hourly chart of the cash S&P going back through the start of this rally from the March 6 low. As I told you in my last post I think that this reaction has a good chance of stopping at the highest purple dotted line you see on this chart. This is midpoint support based on the reaction we saw in early April and also the level at which this break would equal the size of that early April break in the e-minis (which was bigger than in cash because both extremes were made outside the day session in electronic trading).While I think a good rally will start from 825 I have to entertain the possibility that it will end at a lower top. This is worth thinking about especially because the market has had no rallies on the way down from 872 thus far. If the rally from 825 does end at a lower top (probably one in the 845-50 range) then the next step down would carry the e-minis to 805 or so (lower of the two purple dotted lines). This is midpoint support defined by the late March reaction. A drop that low would make this reaction the biggest one since the March 6 low.
I have marked with the red dashed line the midpoint of the entire rally thus far- it stands at roughly the 771 level in cash. While I don't expect this drop to get anywhere near that line I also think that any penetration of that level would mean that the market would be on its way to 700 or even lower.
Having spoken only of reactions in this post, I want to reiterate my view that this market is going to hit 940 before it drops near to or below 771.
1 comment:
Hello Carl,
as you know Bear markets have three phases: sharp down, reflexive rebound, and a long fundamental drawn-out decline. By “reflexive rebound” what is meant is a real bear market rally that can last between four to eight months and have the capacity to rebound between 25% and 50%.
What makes the reflexive rebound different than a flashy bear market rally is that it’s not just short-covering and other buying on the part of the ‘pros’, but real money sitting on the sidelines that is put to work. This is why the reflexive rebound tends have more staying power.
No durable bull market has ever occurred without their being a macroeconomic inflection point within reasonable proximity of the market low. For example: the national highway network in the 1950s, the space program in the ‘60s, and the spectacular household formation of the baby boomers and consumer balance sheet expansion that sharply bolstered domestic demand in mid-‘70s. The post-1982 bull market was driven by massive reductions in top marginal tax rates, deregulation and declining unionization rates. The 1990s was led by tech induced productivity gains and rapidly diminishing fiscal deficits; and the last bull cycle from 2003 to 2007 was a function of leverage and a speculative debt-fueled plunge into residential real estate – ill-timed as it turned out.
While I am still looking for prices above 900 before this reaction is over I cannot help myself but over the next 18 month I would not be surprised to see the SP trade below 600.
Cheers
Susn
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