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Charts and Fundamentals: Why the Rally Should Have Legs


Indications that the rally will continue, both fundamental and technical -- and the levels bears need to reclaim to recover.

MINYANVILLE ORIGINAL My last update noted that probabilities favor that this rally leg since November is only half-way complete. I continue to favor that view. Yesterday performed as expected for a nested third wave rally, and the bear count (which I've discounted since October) is very close to being invalidated once and for all. Trade above SPX 1474 would accomplish that.

This market has an awful lot of bullish potential, but what can bears do to put an end to it all? In this update, we'll cover, in brief, some key signals and price points to watch going forward. There is also one important fundamental factor, which suggests more rally fuel, that I'll cover later.

The first chart I'd like to share is the Philadelphia Bank Index (INDEXDJX:BKX), which, as long-time readers know, I believe has acted as a critical "tell" over the past months. BKX has finally vindicated my view that the November low was, in fact, an intermediate bottom, and that the decline into that low was corrective. The chart below is the daily BKX and covers the two most likely wave counts.

(If you're new to Elliott Wave Theory and don't understand how it works, you may want to review my article on the subject: Technical Analysis: Understanding Elliott Wave Theory)

As noted on the chart, the first bearish option isn't particularly bearish, at least over the intermediate term. The first bearish option would see this as a three-wave rally, which could complete after another small leg up or two, then a large correction (50-62%), followed by another new high.

The bullish count is exceedingly bullish, and, without any present evidence to the contrary, I am left to continue favoring that count. Currently, the bullish potential is such that one probably simply wants to chase the market higher with stops, since if this is the "nested" third wave depicted, it will only correct from time-to-time on its way higher (much like yesterday's action).

Click to enlarge

The S&P 500 (INDEXSP:.INX) outlines the preferred bullish option, and notes some key levels. The bears' final hope here is that the wave I'm viewing as wave 3 is actually wave C of an ABC correction (shown in more detail on the INDU chart that follows). Trade above 1464 would put the bear count under severe duress, and trade above 1474 would finally lay it to rest.

Click to enlarge
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No positions in stocks mentioned.
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