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Market in Rally Attempt

When I wrote my post on July 7th about stocks rallying on earnings expectations I warned about this rally as it is not confirmed and it may fail. Even though the market made an impressive move and achieved great gains since then, it is still in an overall downtrend. Last couple of days I was quite busy, so today I could go back to check the chart more in detail and determine whether I can consider this rally attempt to be changed into a confirmed rally, since the market was gaining the whole last week.

If you had a chance to study books about how to recognize the trend of the market, you may already know what the characteristics are. When you take a look at the chart of S&P 500 you won’t see the market in confirmed rally yet:


To confirm the trend we want to see it creating new higher highs and new higher lows. We want to see it trending above 200 MA and above 50 MA. None of it is happening yet. Although the market created nice reversal in oversold zone (see the arrow) on a strong volume and moved more than 3% that day, this new trend still may fail. When you take a look at the weekly chart, the picture is even clearer:


When taking look at the weekly chart, we can see that the market did a reversal in March 2010 which ended the previous impressive recovery rally and then on strong momentum declined and reversed in June 2010. However as we experienced that June’s trend failed. So this new rally attempt still doesn’t tell us anything about the trend. Will it survive or will it fail? If it fails, the momentum is getting stronger and we may expect further drop dragging the stocks down with it, or if it survive, the stronger momentum can move the market higher and we can start recovering from this correction (which still looks quite healthy to me, so no worries about second dip…yet).

Until this happens, it would be very risky buying stocks right now. If the trend confirms itself you may feel sorry that you haven’t jumped in, but buying now may bring losses if this is a false trend. The choice is yours.

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