Yesterday's monster rally was not expected by most people, me included, and it left me a little disoriented. For weeks the Fed has been expected to raise interest rates by 50 basis points, and the realization of that expectation should have caused the market to sell off, shouldn't it? About 3:00 A.M. this morning an old Wall Street saying came to me: Buy the rumor, sell the news, which I have known, like, forever. In a bull market buying the rumor gets you in early. When the rumor finally becomes news, the last buyers come in, and a correction is likely.
We're in a bear market, so the opposite of buy the rumor, sell the news would be, sell the rumor, buy the news. What happened ahead of yesterday was that people were shorting the market based upon the expectation of a 50 basis point rate increase. When the news was announced, the shorts were eaten up in a massive short-covering rally because there were no sellers left.
I had just about talked myself out of writing this article (just a little late, Carl), but watching the financial news, there were, of course, no stories addressing the technicals. So here I am.
At DecisionPoint we have a set of indicators that we use for climax assessment. A climax is a one-day event when market action generates very high readings in, primarily, breadth and volume indicators. We also include the VIX, watching for it to penetrate outside the Bollinger Band envelope. The vertical dotted lines mark climax days -- red for downside climaxes, and green for upside. Climaxes are at their core exhaustion events; however, at price pivots they can be seen to be initiating a change of trend.
On Tuesday there was an upside initiation climax, which we normally expect will initiate a short-term rally. On Wednesday we got a rally, but there were also massive climax readings. Since Tuesday was an initiation, Wednesday's climax was identified as an upside exhaustion climax, which could mean that the rally was exhausted. As of this writing the market is down over -3.5%, far worse than we might have expected.
Note: These indicators will not update until after today's close.
Conclusion: Yesterday was a one-day short-covering event. In hindsight we can assess the March rally as a short-covering event, while not nearly as fast and dramatic as yesterday's. Each of these rallies was a reaction to too many people being on one side of the boat. I don't know where the market will close today. I don't even know where it will be five minutes from now, but I strongly believe we are in a major bear market, and that we won't see the bottom of it for a long time.
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Technical Analysis is a windsock, not a crystal ball. --Carl Swenlin
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