Rally or Just a Bounce?

The S&P 500 is poised to pierce important resistance around the 895 area. On the daily chart this is a significant swing high. Note the slope of the declining 20 day EMA has flattened substantially and is now acting as support around the 875 area. The 825 and 850 areas have repeatedly and successfully acted as support last week.

On the 60 minute intraday chart the significance of the 895 area becomes even more obvious as this is also where the 200 period EMA is. Note the slope has flattened. A successful upward penetration of the 200 period EMA is now more probable.

The S&P is likely to rally to the 975 – 1000 area before the year is out. The panic months of October and November consisted of forced liquidation. The ‘rinsing’ of weak hands is plainly visible in the number of Major Distribution days (where down volume exceeds up volume by a factor of 9:1). Mutual funds and the hedgies all positioned into year end early and aggressively fearing massive redemptions (and rightly so). This means that selling has now dried up, especially as prices move off the lows. Hedges will now get triggered as this market gets hijacked by the ‘momo’ funds looking to squeeze the shorts in a low liquidity environment. Expect near parabolic moves in the really beaten up names.

A word of caution is warranted. This ‘rally’ is nothing but a ‘bounce’ until proven otherwise. The Monday after the Thanksgiving Weekend resulted in the single largest Major Distribution Day since the crisis started. Down volume exceeded up volume by a factor of 80:1. That is massive. HUGE. Until that distribution day gets answered by a massive Major Accumulation Day (or a series of lesser ones) be wary of a post holiday, early 2009 collapse in risky assets.