[Rally Confirmations--Part 2]
I accept O'Neill's timing for the measurement period for rally confirmations (that is, looking for the confirmation on Days 4 through 7 after the rally attempt). At least, I'm not prepared to argue with it. But I don't think 1% moves in the major indices tell us much in a market this volatile. With the NASDAQ at 3400, for example, I certainly wouldn't be ready to say that the market has confirmed a rally on the strength of a 34 point move. As far as the NYSE is concerned, I don't think the NYSE has been telling the story about the market for quite a while. At least since the 1998 bear market, in any event, when the NASDAQ (and the S&P, secondarily) was clearly the index to watch. Nothing has changed since then.
At present, I look for at least a 2% move in the NASDAQ and the S&P, on strong volume in the NASDAQ, on Days 4, 5, 6 or 7. The fact is that this kind of move is really only the basis for investors to start getting some optimism about the market. It suggests that the market has begun to change trend, but it doesn't really confirm that the market is rallying. So what adds up to a real confirmation?
Here is where we really run into problems with the IBD approach. And in fact I think IBD, these days, understands that the old 1% rule is just not that useful any longer. In the second leg of the down market in the Spring, we had a rally attempt that started on April 17 with a move up of just over 7%. Then we had a strong day in the market on April 25 (the Nasdaq moved up about 6.5%) that appeared to confirm the rally attempt the previous week. By May 1, it was all over and we started the slide down into the next leg of the down market, closing at 3205 on May 26. So that is a major example of where the IBD method did not work.
Of course, on the confirmation day in April the market didn't go up 1%. It went up over 6%. So is the only problem with the 1% rule alone? No, its also with the one-day rule. In other words, I'm suggesting that no matter what the performance of the market is on one day during that period from Day 4 to Day 7, its very dangerous to say that a rally is confirmed on that basis.
[Continued in the next post] |
