Stocks Rebound 669 Points as Trade Fears Ease, Not so Fast...

Tuesday March 27, 2018

The headlines and news read

Monday's 669 point rally reversed half the losses of the two day swoon last week.

True enough but as Richard Russell, advocate of the Dow Theory and Dean of market letter writers, used to say, the bear is a lot more clever than the bull.

DJIA

 

In a bear market stocks decline again and again. The declines are broken with amazing rallies. The rally off the Feb 6 low was around  1,500 points in a matter of a few days.

What happens is this. Bets shift from long to short. Shorting a stock means that one borrows stock and then sells it, putting the proceeds in a brokerage account. To gain a profit, the stock price has to fall. Then the short seller must buy back the stock to 'cover' the short sale. Sell high, buy low is the new mantra. Those large purchases are usually triggered by a 'trailing buy stop.'  A buy order is entered above the market so that when the market reverses the stock is bought.

Now look at the chart of the DJIA above.  The DJIA has a pattern of lower highs marked by the blue arrows. In this two hour chart the 669 point rally on Monday is not so impressive. The larger question is, how long will the Feb 6 low under 23,500 hold?  the market bounced at that level yesterday but this is just the first probe of the prior low.

Berkshire B Shares

Warren Buffet's flagship stock BRKB has held up better than the overall market, double topping on rebound at 213. But it too is probing the Feb 6 low. Six points is a  nice rally but it still looks counter trend.

How about the strongest index, the NASD 100?

The NDX bounced at a higher level. This is a result of the FANG mania. All indexes will not collapse at once, giving hope that this is indeed a correction and not a bear market.

Percent of Stocks in Bull Formation

The trick is not watching headlines but the market itself. Here the percent of stocks in bullish formation has already made a lower low. Not the spike high in January was a throw over, above the uptrend channel. Such throw overs often mark a final exhaustion peak of positive mood, literally as good as it gets.  resistance looks to be at the 60% level.