Thursday, April 30, 2009

S&P 500 Breaks Out of Triangle

Week 8 of rally +32.5% of a gain in the S&P 500. And still the buyers rush in. There might have been a rally of this nature that I've experienced in the past but I can't recall anything this strong in such a short amount of time with no relent. Maybe in 1999 on the NASDAQ.

We said there would be a rubber band (snap back), reversion to mean effect in early March as the S&P was a historic 40% away from the 200 day moving average. Never did I imagine this quick and almost without a break. We have not had 3 consecutive down days in the entire rally, now 2 months long.

Looking at the chart we've said S&P 875 was the key level, and now we've broken above that level. The OBVIOUS situation here is to buy and pile in. But is it too obvious? I don't know right now - this market has escaped the rationale I am using as my basis. The "gut feel" is to throw in the towel on the short side, which was the exact same feeling one felt on the long side 2 months ago. Just as you could wake up every morning and short the market and win 90% of the time in January and February, now the opposite is true. I just worry about the extremes here - and how long in the tooth this rally is; but I've been saying that incorrectly for 3 weeks.

The next real resistance other than the "big round number" of 900 is the high of 2009 around S&P 930. The 200 day moving average is up near S&P 980 and falling by the day. So those would be upside targets. The technicals say keep buying, and right now any argument against that has been a wretched outcome. I would expect a lot of shorts to throw in the towel here, and just about the time every short takes their ball and go home is when we'd have some correction. But for now respect the trend until it changes and short is wrong.

One caveat - volume is weakening this week compared to the last few - one would think that is a "distribution" effect. But prices skyrocketing on lower volume still destroy short positions. It just signals some caution.

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