Saturday, October 15, 2011

S&P 500 rallies 11% in 9 days - Bear Market rally vs Bottom ?

This is again an ` technical `attempt to assess if recent rallies in S&P 500 is a bottom or just bear market rallies.
Summary - Too early to call a bottom yet.
Had posted a study based on 3 trading days rallies and then what happens 7 trading days after that.And the finding was that over 80% of the time , we have a negative closing of ~ 3-4% after 7 trading days.
Now we recently had a 3 day rally of +8.4% ( from 4 Oct 2011 intra day low of 1075 ). But it is already 6 trading day - 14 Oct 2011 , after the end of the 3rd closing day (on 6 Oct 2011) and S&P 500 is still at 1225 or +5.1% above.
This makes a 9 trading day rally of +11.4% of S&P 500 from closing of 1099 on 3 Oct 2011 to 1224 on 14 Oct 2011. Now how does this compare with past bear markets ?
9 trading days gains of over +10% is pretty rare in bear markets. In the last 2008 bear market,  we had just two instances.
  1. 9 day rally of  +12% on 8 Nov 2008.  On that day ( 8 Nov 2008) , S&P 500 closed at 1005. 12 trading days later, S&P was at 752 or down by -25%
  2. 9 day rally of +12% on 4 Dec 2008 - On that day ( 4 Dec 2008) , S&P 500 closed at 845. Now in this case, even after 7 trading days , S&P kept going higher to finally rally +21% , 17 trading days later.
I have observed bear markets in 2001 also. Typically Bear market rallies last 11 % to 13%. So though the current evidence is slightly in favor of more declines ahead i.e re-testing -1100 - 1120 again, we also have a strong rebound - at least 8 countries are above 50 sDMA and risk currencies such as AUD vs USD is surging. NASDAQ is just 1% below its 200 DMA of 2700.
But in the past, even in Bear Markets , we have had such 50 sDMA breakouts / fakeouts that lasted for just week or couple of weeks before tumbling down again. But for this to happen again, I would like to see the dollar appreciate and the Euro Countries stock market go below 50 DMA.
So how to tell if this is the bottom ? Well in Mar 2009 bottom ( S&P closing of 676 on 9 Mar 2009), we have had 9 trading day rallies of over +8-10% for 7 consecutive trading days.

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