A Failed Rally

Market Overview

“A bear market rally occurs after an important decline, rapidly retracing a good percentage of it, but it has no staying power and comes back down as quickly as it went up”. That seems to be a good description of what happened last week. Last Monday, SPX ended a decline from 2104 at 1994 and bounced back immediately, rising to 2076 by Wednesday. At Thursday’s opening, it tried to exceed that level, found that it could not, and started back down, continuing to drop steadily into Friday’s close where it finished the week at 2005 having retraced 93% of the early-week advance! That looks like a bear market rally to me.

Whether or not we are in a bear market is something that the future will tell us, but it’s starting to act like one and, based on the degree of distribution that took place on the SPX P&F chart between March and August of this year, if we drop below 1868, we are looking at a potential 600-point decline from the top — and this is a conservative estimate. We don’t have to put a label on the market’s condition, but we have to admit that it is not acting in a way that should inspire confidence to the bullish camp. If this continues, and especially if this decline goes on to exceed the August lows, it will become clear that we have started an important correction which will continue until the direction of the trend changes.

Why should a bear market start at a time when the economy is recovering well enough to inspire the Fed to start increasing interest rates? It would not be the first time that a similar question has been asked at the beginning of a bear market. The answer lies in a study of cycles. This is what Eric Hadik (www.insiidetrack.com) does very well. Cycles can give us an inkling of what the future will bring. Eric had predicted that a serious decline would start in August followed by a recovery, and that a second phase of that decline would become manifest about now! Kudos to Eric! It looks like he was spot on!

Intermediate Indicators Survey

Both the weekly MACD and SRSI are now in an established downtrend.

The Summation index (courtesy of StockCharts.com) totally ignored the rally part of last week and has continued to decline, from 0 to -200, so far. So have its RSI and MACD which are nowhere near their oversold level, suggesting that the downtrend of the main index is not likely to be complete.