Wednesday, May 26, 2010

Market rally now looks obvious, but be aware it is only temporary.

Yesterday's reversal and return to an almost unchanged level sets up today the rally back up to about 10,500-10,600 range over the next week or so. The final leg of the last "W" pattern is being formed if you look carefully at the chart. There is no way to know for sure its length or duration, but one thing is for sure, after this leg up we are headed down to retest this support line and I believe it will fail to hold. The chart above shows 2 other things. First it shows a reason why the market didn't go lower yet. It was at a significant support level that if and when it is broken will result in a significant market drop all the way to about 7,800-8,000 level as the first major plateau of this return to a Bear Market.

The market should be heading down with the news this morning that Durable Goods Orders for April fell, compared to March's rise. Nondefense capital goods, excluding aircraft, often called core durable-goods orders, fell 2.4% in April after a 6.5% gain in March. This would be bad news and if news really drove the market, as many claim it does, then we should have been in negative territory in the Futures market, but the Dow is up 93 points and the Nasdaq is up 22 in pre-market. I hope you now get it that the news or any news does not drive the market. It is human patterns that drive the market.

The other thing it shows is that while the markets were dropping Volume increased much beyond the previous leg up of the market. Compare the volume in the last phase down, shown within the Blue arrow, and that of the previous period of March 1st to the end of April. You will also notice that the period of February the volume was also higher in the small declining period that month. This gives additional validity to the argument we are in a Bear Market Rally.

I will ride this rally up and be prepared to sell, when the market reaches my target. I will repurchase TZA Call Options simultaneously, as we approach that target.

Yesterday, I purchased TZA Put Options for October expiration for $0.90 each share. I plan to gain on these as the market rises also on the Russell 2000, along with the S&P 500. All indexes have a similar pattern with their own Support levels if you look at 1 year chart patterns of the daily closing prices. Good luck on this next leg up. But keep in mind we are about to have a significant market crash this Fall.

Click on the chart to enlarge it for better viewing.

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