Happy Reformation day! On this the 501st anniversary of Martin Luther’s bold act, and the eve of All Saints Day, the markets are making their first real attempt at a new rally. The sequence to determine when a bottom is in (mentioned in our last bulletin) may be starting to play out. Monday’s internal technical action sported a ray of hope with two minor “positive non-confirmations”; a contraction in the number of stocks hitting 52 week lows on the NYSE (even though the S&P500 went to the lowest point in the current down move) and lower trading volume than the prior day on the major exchanges (read: NOT a Distribution Day). As a result of these and Tuesday’s positive action, a new attempt at a rally has begun. Today is “day two” of the attempt. While it is too early to say that the correction is over, the market is showing some encouraging action. However, of the 4 specific technical events we are watching for to effect a change back to a green light, only one has happened to this point. Based on these technical facts, our light remains “red“.
In order to confirm that this rally attempt is more than just an attempt, the market needs to stage a “follow-thru” day. According to the excellent work of Investors Business Daily, that confirming event typically happens between days 4 & 10 of an attempted rally. If one happens it does not guarantee that a new bull market will begin, but it certainly increases the odds of one developing. If no follow-thru day happens quickly, then the market would likely succumb to more selling pressure and retest the recent lows… and maybe worse. This sequence takes time and can be quantified by the daily price and volume action of the major indexes. Wise investors allow the market to be their guide and not their emotions.
To repair the recent damage suffered by the indexes and most stocks and to relieve the fears of many investors, the market will need a catalyst to make a meaningful move higher. There are 3 possible catalysts that could have a huge impact on the markets in the near future. 1) The election: Going the way investors perceive to be “pro-business”, 2) China & Trump agree on a trade deal, and 3) The Fed delays or calls off future rate hikes. Can you imagine the rally that would ensue if 2 or more of those happened near the same time? Can you also imagine the likely market collapse if none of these “go the market’s way”? There in lies the rub. Be patient. The market will tell you what to do & when. Have a Triumphant day! ®