Tuesday, November 20, 2012

Monday's Targets Reached; Will Bulls Hog the Whole Turkey?

I admit the article title is a weak attempt toward being cute by invoking the Thanksgiving holiday -- and I realize I'm mixing metaphors with "bulls" "hog" and "turkey."  This is making me hungry (though when I really want to eat bull, I just turn on the TV during a Bernanke speech).  Anyway, I'll try to do better on a Thanksgiving-related title tomorrow. 

Yesterday's update expected a rally, with a first target of 1378-1390 SPX.  The S&P 500 rallied with furor to 1386.87, and closed at the session highs.  The big question now is whether this is simply a bull trap, or a more meaningful turn.  Later in this update, I'll cover some of the key upside levels for bulls to reclaim.

Monday showed strong internals, and that suggests this rally will be more than a one-day wonder.  In fact, the strength seen yesterday is often associated with significant bottoms, as shown on the chart below:

My first upside targets were all reached, and the wave could count as complete, but it's entirely possible this leg has further to run.

Given the five-wave impulsive nature of the rally and the strength of market internals, the odds presently suggest that more upside will follow after the first correction.  As noted in yesterday's update, the market reached an inflection point on Friday -- though of course, nothing significant had developed as of the time of publication.  But now we can see that bulls have responded to that inflection point with fury, and this leaves open the possibility that an intermediate low has formed, though presently the intermediate trend should still be considered "down."  The chart below details the near-term path for the bull prospect, as well as the bearish prospect, and notes the key levels for bulls to reclaim.  Sustained trade below 1360 will favor the bears.  (continued, next page)

Finally, the longer-term chart of the Philadelphia Bank Index (BKX) is one of the things I'm indirectly referencing in recent updates when I've mentioned that I'm not completely sold on the long-term bear case just yet.  Note the impulsive nature of the rally from the October 2011 low, which suggests there are new highs still out there for this market.  Also note that key support has held so far.  I have outlined the conservative bull case in red, and the conservative bear case in black, as well as the next two key levels.

In conclusion, Monday's rally into the upper edge of my target zone was impressively strong, and seems to have caught many shorts on the wrong side.  Odds favor more upside before new swing lows, but the bulls still have some key levels to reclaim in order to turn the intermediate trend back up.  Whether they will or not remains to be seen, but yesterday was a promising start.  Trade safe.

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