This is the question that everybody wants to know the answer to these days. Now that the markets have “tested the lows” is it off to the races now? I’m going to play devil’s advocate here and go against all this new found optimism that seems to be all over the news. I’m not a permabear at all, and while I do think we could go a little bit higher here, I’m not convinced a bottom is in place. Now if we have a follow through day on massive volume, breaking out of this descending triangle, then maybe we’ll go a little higher than I originally thought, but I suspect we’ll be turning back down soon. I won’t be rigid in this believe as trader’s have to be flexible, but I’m just having troubles finding places to put money to work on the long side.

djia

30 Day – 60 Min

According to this chart we never really did go down and test the lows of early October. We’ve really be consolidating in an descending triangle with some rather negative characteristics. While we do have some bigger volume up days, they are hardly anything to exciting to talk about. The volume was barely above the 50 day moving average and these past few days it has been declining. If serious money was accumulating this move up you would see huge volume pouring in as people would be tripping over themselves to buy. I think what we have here is short covering, some value investors dipping their toes in, and momentum players hoping to catch a tradable rally. It will take some more volume and a decisive move out of this triangle to get me excited about this recent spike up. And the first sign of the markets moving back down will have traders exiting longs and going short. At this point the most likely scenerio is a pop up to sucker in as many traders as possible on the long side and then the hammer will come back down.

djia

30 Day – 60 Min

This is just a close up view of the action so you can clearly see the lines of support and resistance. When you look at this perspective the daily moves don’t seem so violent, but as we all know this is the most volatile time in most of our investing careers.

nasd

The Nasdaq appears to be making a series of lower highs and lower lows, and until this trend is reversed you have to assume that we’re still in a downtrend. It’s also significant to point out how volume always increased on the moves lower and most recently it has decreased as the Nasdaq has moved higher these past 3 days.

The following is from Yahoo showing how bear markets are infamous for having huge gains and we’ve only experienced 2 of these such days. I think that since all investors have never experienced this type of action, that we are all to quick to jump on an 11% rally as the being the saviour to end the bear market. This chart from the Great Depression closely resembles a stair step down pattern that the Nasdaq is currently in.

clipped from biz.yahoo.com
A look at the bigger picture reveals that seven of the ten biggest percentage gains occurred during the Great Depression. Six of them were mere bumps on the Dow’s way down. On average, the Dow declined another 60% after each bounce before the bottom was reached (see chart).

The biggest gain, 15.34% on March 15, 1933 marked the bottom of the 3 year carnage. A 10.15% bounce on October 21, 1987 occurred within 10% of the 1987 low.
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