Here Comes the Rally

Oversold SP500 is Overdue for a Signficant Rally.

This appears to be the start of the rally back up to 800 retesting the Oct2002 low between the 2001 and 2007 tops. When that was taken out, a bearish Double Top in the SP500 was confirmed calling for an eventual drop to SP500 450.

Individuals are too Bearish.

Last week's survey of Association of Individual Investors bearishness was 70.3% which is the highest level in my database going back to 1987. When that many individual investors are bearish, they are probably wrong in the short-term.

The Short-term Scenario I Expect.

If this really is the start of something significant, we should see some resistance at each unfilled gap exactly as we're seeing now in the chart above as sellers liquidate at the low sides of each gap (GR1 and GR2 above). Once the sellers are overtaken, the SP500 should move higher to near GR2 which could happen today. I've drawn a sample NL? resistance line that intersects GR2. When/if the SP500 turns lower resisted by NL?/GR2, we'll have setup a potential Head-and-shoulders bottom (HSB) pattern. We'd like to see the SP500 turn lower off the NL?/GR2 line back down to about GR1. After that, a new rally over NL? will confirm the HSB. The implications of a confirmed HSB after confirmation is the height of the pattern which should end up being about 60 SP500 points taking the SP500 to around 800 as we expect.

Our Plan.

As I mentioned last time, we'll liquidate the rest of our long positions not managed by mechanical methods at the next close over 800. We are strongly considering managing much of that capital with our mechanical BBS short system and will let you know if we decide upon that plan.

Finally.

I believe President Obama he is doing what he believes to be best for America in the long-term. Having said that, I believe our main economic problem is deteriorating asset values and policy to solve that issue should be the main priority. In my opinion, the reverse Wealth-effect will not be overcome by demand-side federal spending, which I'll be writing more about later. We need drastic policy to stabilize, or at least make it possible to appraise valuations, in our real-estate market. If that occured, along with some bank accounting changes, banks would stabilize. The point when the market is convinced that banks will become stable in the near future is when stocks will signficantly recover. Then we'll be on our way out of this mess. Unfortunately, I'm just not seeing it and therefore I believe that the economic fundamentals concur with the technicals, which implies another significant leg down in the market.