The Running Of The Bulls
The market moves in mysterious ways. If someone
claimed on March
22nd
that the Dow would be trading at 11,340 in two months, after having just
touched the 9100 level, we would have labeled him or her a heretic. If
someone told us that the Nasdaq 100 index
(
NDX |
Quote |
Chart |
News |
PowerRating) would rally some
53% from its lows of April 4th in only six weeks time, we would have
recommended that they check themselves into a substance abuse program. Nevertheless, this evening we find ourselves reviewing charts and potential
resistance levels, without a clear picture of what is really going on here. In the SPX (S&P cash index), for example, we see a weekly chart
displaying a downward-slanting expanding triangle.Â
The main characteristic of this pattern is its unpredictability and
volatility. Therefore, trying to predict the market’s next move is
extremely
difficult at this juncture, as all three indexes have staged incredibly
significant rallies through multitudes of resistance levels on decreased
technical strength and momentum. Hence, any market veteran will tell you
that the thing about bear market rallies that is so frustrating is that they
never trace out a pattern that we (as technicians and chartists) consider to
be normal market dynamics. Rather, the moves higher are exacerbated as key
resistance zones are overcome due to the continual shorting activity that
occurs at these levels. This is a game of supply versus demand, and the
market clearly won’t stop its relentless move to the upside until a level is
reached where supply overtakes demand. At this stage of the game, that level
remains elusive. We can point to Fibonacci retracement levels, gaps,
trendlines, and all the other things that are supposed to present resistance
to upside advances, but they are all meaningless until demand ceases and
supply begins to regain control.  Â
At present, we are witnessing a massive polarization of opinion that will
probably continue to grow in the coming months. As such, the overwhelming
bullish sentiment will only increase, as any pullback that is encountered is
bought aggressively, adding to the aura of invincibility. This is already
evidenced to have been taking place, as prior pullbacks throughout April and
May have been characterized by extremely small responses in the VIX and VXN.
This is key sign that extreme complacency exists even during negative price
action. As a result, it is my opinion that bullish sentiment will grow to
the level of being antagonistically bullish throughout the month of June–meaning that those with bearish views will be scoffed at and discredited for
their unpopular and presently unprofitable views. Nevertheless, it is the
job of Mr. Market to convince as many people as possible to blindly commit
their money to the “church of whatever’s working now.” The
complacency and the bullish sentiment will need to develop to greater extremes to ensure that
those same people will be buying the tape on the way down when the ultimate
move below this year’s lows commences.
As far as trading possibilities for Tuesday, virtually every technology
stock I have reviewed can certainly be viewed as a continuation long above
today’s high. It seems like a rudimentary approach but, what the heck,
they’re buying ’em. Shorts haven’t been working as the negatively
diverging
NDX chart I featured in my weekend commentary (somehow) broke decisively to
the upside. In fact, intraday pullbacks of any tradable significance are
currently a thing of the past.Â
The NDX is already up nearly 52% from its April 4th lows; it is already
breaking historical records. Remember, the great “suckers rally”
in 1930
(after the decline of 1929) was a 50% rally in the DJI and is beginning to
look like it will pale in comparison to the present rally in the NDX. In this instance, I feel the party will continue to rage on and
the music will get louder for the next 3-4 weeks, as the current technical
patterns will need to exhaust themselves after further upside exploration and
multiple subsequent failures at price highs. The key is making sure you
leave before the cops bust it out.Â
Goran
P.S. For this piece, I
used some key ideas that were presented to me today in a telephone
conversation with Glenn Neely, author of the book “Mastering Elliott
Wave.”