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Thursday's Rally Not Substantial Enough


The bigger picture remains unchanged, and has only gotten darker.


Putting Thursday afternoon's recovery into perspective...

Thursday afternoon's steep rally seemed so substantial. A 4-hour, 21-point rally IS substantial. But at this point in this pattern, it's not substantial enough. Last Friday's opening surge met and held a corrective bounce target. The target was derived from a "reverse ascending triangle" (sometimes called a "broadening bottom") that had formed during the prior week. Meeting and holding the corrective bounce target required a break under the pattern's lows, which Thursday's drop fulfilled. Thursday's low still needs to be retested as support.

The two-week old "reverse ascending triangle" was formed by repeatedly recovering from probes of lower lows. Think of this price action as a military maneuver, probing the defenses of enemy lines, with enemy forces repelling each probe. Now fast-forward to Thursday morning's drop to new lows. Think of Thursday morning's drop as another probe, this one finally succeeding at finding a weakness in enemy lines, a hole so big that the probe retraced half of November's gain before being repelled. The probe itself lacked the force to proceed lower on its own. But Thursday's volume suggests that buyers required - and expended - an inordinate amount of force to repel only a probe. Think of Thursday afternoon's rally as the probe returning to base camp for reinforcements.

Now think that the enemy force is the Bulls.

Hardly any of Thursday afternoon's rally was retraced Friday morning. And higher highs were nominal, while MACD and RSI price momentum indicators deteriorated. None of which adds credibility to Thursday afternoon's "substantial" rally. A deeper pullback at the open would have indicated that pessimism was rebuilding its proverbial "Wall of Worry" for a rally to climb. Alternatively, a morning rally would have meant that Thursday afternoon's recovery had legs. Instead, the morning only ranged narrowly around Thursday's close. This is complacency's equally unattractive twin, "indecisiveness," and this is no time for that.

The bigger picture remains unchanged, and has only gotten darker. S&Ps had already fallen back to the year's lows two weeks ago, retracing four months of gains in less than three weeks. Thursday's lower lows retraced half of last November's range. The Dow has yet to print a new low for the year, but it has come near enough for new lows to be required. Meanwhile, the Dow formed a Head & Shoulders top from March through April, and its breakout leg is now being corrected. As for Nasdaq's Composite and NDX, their bounces into last Friday's peaks failed to recover above last year's highs. See the charts below:

Typically slow summer months are just ahead, a time period that relies heavily upon the prevailing trend to determine its direction. The market is expending all of its energy to defend against invading forces. And the thundering sound of hooves growing over the horizon isn't the cavalry coming to the rescue.
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