Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Rally's "Ineffectual Optimism"


The rally's "ineffectual optimism" has been great for the gap-up business, but not so much for trending.

Each new high leaves behind it a prior low. Subsequent pullbacks that retest a prior low can refuel a trend - but there's a risk: The intraday test must be recovered on a closing basis, because a close under the prior low can reverse the trend.

S&Ps have lots of priors, but no conviction. Last Tuesday's intraday dip recovered to close above the prior Thursday's lows, allowing Wednesday's opening gap up to new highs. Friday's test of last Tuesday's prior lows wasn't so strongly rejected, but it did hold. And so did the prior Thursday's lows.

However, Friday's dip differed from last Tuesday's intraday test of prior lows. Its difference was actually its similarity to last Tuesday's dip, in that each test of prior lows developed after a gap up to new highs had failed to extend higher. Last Tuesday's dip was a simple refueling operation; Friday's retest of the same prior low suggests that the refueling wasn't enough.

The low volume accompanying Friday's dip made another bounce likely Monday, and S&Ps have rallied overnight. A bounce on low-volume would further suggest that buyers still haven't been refueled. A low-volume bounce can still gain traction to probe May's prior highs, especially if sellers produce relatively less volume. But that doesn't mean a new high would stick any more so than the last two.

The past week's consolidation is already well-enough formed for its short-comings to be credible. And those short-comings don't form a solid enough base for originating a sustainable breakout. Higher highs would become unlikely under two scenarios: 1) a pullback from Sunday night's bounce fails support at SPX 1313.75 (ESz 1323'75), or 2) a test of Thursday morning's lows around SPX 1325 (ESz 1335'00) falls back under SPX 1321 (ESz 1331'00).

These two scenarios don't sound optimistic. They aren't, and that's their point. The rally's problem is its "ineffectual optimism" which has been great for the gap-up business, but not so much for trending. A deeper pullback here without delay would rid the market of this overhanging sentiment, patience that would probably be rewarded by a more sustainable rally from lower levels.

Immediately attempting higher highs instead - if only to retest Thursday morning's lows under the second scenario described above - would reflect too much optimism emanating from dysfunctional base to be sustainable. Alas this morning's open is taking the high road, indicating a gap up from Friday's test of prior lows. And in this pattern, the low road would have been more bullish.
< Previous
  • 1
Next >
Short-term long or short positions may be held from time to time.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos