[This is my first post in this thread, so replies about the form as well as the substance will be really welcome. Too long? Not enough detail? Useful stuff? Totally boring? Let me know!!]
Let's talk about the current rally attempt and what we think is happening: is the current rally attempt for real or a bear trap? We'll do this in several posts today. Apologies in advance to those of you familiar with the subject matter.
First, as far as the direction of the market, I think the question to ask right now is not "When will the market turn around?" I think the right question is: "Has the market turned around?" This is a basic notion: predicting the market is not the key. I try to focus, instead, on understanding what the market has just done. In other words, I don't try to time the market. I just try to focus on understanding what the current situation is.
I am an IBD reader (no connection with them other than my subscription) and I think that William O'Neill has at least some parts of a workable approach to the question of when the market has turned around. (No technical solution to a problem in the market, however, is perfect). The objective, at any rate, is to avoid bear traps--quick turnarounds in the market after a move upward consistent with some technical signal.
O'Neill's concept is fairly simple. First, a rally attempt occurs when one or more market indices move upward by at least 1% on higher volume than the day before. We had a rally attempt last Friday ( October 13), with big moves in all three indices on heavy volume. A lot of investors jumped in Monday and found themselves in the midst of a very difficult market the first three days of the week. O'Neill's basic concept, however, is very good: the key is to wait for a follow-through, or confirmation, day.
Here is O'Neill's version of how the basic process works. Last Friday we had a rally day, and you count it as Day 1 of a rally attempt. We are then looking for a follow-through day between Day 4 and Day 7 of the rally attempt. The follow-through, according to O'Neill, should include movement by the Dow or the NASDAQ of at least 1% on higher volume than the prior day. He is not concerned with what happens on Days 2 and 3—this is too soon, in the IBD view, to tell us whether the rally attempt will succeed. He also is not very impressed if we have a big move on Day 8, 9 or 10. The IBD theory is that this is too late to tell us whether the rally attempt that started on Day 1 has legs. In effect, if the rally attempt has not been confirned by Day 7 it is very doubtful. If it hasn't been confirmed by Day 10, it is really dead. [Continued in next post] |
