Spot the Difference

Does this rebound represent the start of a new leg higher in the uptrend dating from the March 2009 low or is it a temporary reaction to short term oversold conditions for bear market rally that topped in Jan 2010?

You may make the argument for both the cases.

Here is the first and simple one-  Both Dow and S&P 500 were down 3 weeks in a row as of last Friday’s close. Those Indexes have not produced a 3 week decline since the 4-week drop in June-July 2009. Thus, both Indexes appeared to be in short term oversold state and hence the market appeared due for a bounce. Going forward volume will be a key to watch.

How about arguments for the 2nd case i.e. a short-term pause in the bear market rally that might have topped in Jan 2010?

This puzzle probably may be one of the most profitable “spot the difference” puzzle that you might have solved since the childhood. Here are 4 interesting charts of the Dow Jones Industrial Average that covers two historically important time periods i.e. The 1929 Crash and Rebound and The 2007 crash and rebound in two different time frames; monthly and weekly.

The top two charts are monthly charts. Key points are-

1. Similarities– A bull market started in Dec 1924 when Dow decidedly crossed 120 after “sideways” for over 2 decades and it touched $386.10, in a short span of nearly 5 years, before crash begun in Sept 1929. During the crash almost 50% of the gains, from the low of 42.30 to 386.10, were lost when Dow touched 195.40 in Nov 1929. A similar bull market started in Dec 1982 when Dow decidedly crossed 1,000, after moving “sideways” for almost 2 decades, and never looked back again since then. It touched 14,198.10 and the crash that started Oct 2007 erased little over 50% of the gains (since a meaningful 1974 bottom). The difference– In the earlier case the points were lost within 3 months, while in the later case it took, almost 18months.
2. Similarities– After forming bottom (1st one), The Dow recovered little over 50% of the losses by April 1930.  Since Mar 2009 bottom, the Dow also recouped over 50% of the losses reaching 10,729.89 (currently Dow is below that level though). The Difference– In the earlier case the points were recovered in less than 6 months, while in the later case it took, almost 9 months.
3. Look at the two weekly charts;  RSI is in a very similar move. After recouping 50% of the losses, just like current one, RSI was heading south from the overbought region.

You can find a lot more similarities and differences vs. that time. In the current global village, money has been poured like never before; governments are acting in a bigger and better coordinated effort (at least short term). However, from a technical perspective, here are my takeaways that I think one should evaluate when making investment decisions in the coming weeks.

1. On weekly charts, RSI is turning lower; this is first time since Jul’09 lows.
2. On the weekly charts, the MACD has given bearish signal for first time since Mar’09 bottom was formed.
3. On the Monthly charts, RSI has reached into the overbought area, first time since Mar’09. Jan 2010 was the first month of big open-close price difference since Mar bottoms.
4. The Dow hasn’t yet closed above 50Month EMA. It has broken its trend-line, first time, dating Mar’09 bottoms and it is trading below 50 days EMA as well.

All this is not to predict what lies ahead. Treat this as an additional data point that might be useful when making investment decisions in the short term. It is a critical point and it might be worthwhile waiting for sometime to see how markets unfold in the coming weeks.

Trade Carefully, Trade Profitably, OP