Buyers Beware: What This Rally Really Is

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Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

Yesterday, equities started the week off strongly with the broaderU.S.and European indices up well over 2% on average. The rally came on low volume, which is to be expected during the last week of August, but the S&P 500 managed to close at 1,210, and thus, above the recent highs from Aug. 17. 

Friday’s long tail on its daily candle was a first clue that follow-through buying has a chance. With yesterday’s rally, however, the S&P 500 still has to prove it can hold above 1,200 for more than a day in order to continue this oversold bounce to the 1,240-1,260 area, which also coincides roughly with a 61.8% Fibonacci retracement off the highs from late July. 

SPX Chart

Looking at the chart of the S&P 500 through a slightly different lens shows it making a decent attempt at piercing above the trading range (white lines) while the stochastics oscillator still has room to move higher into overbought territory.

SPX Stochastics Chart

Many sector charts look similar to that of the S&P 500. Here looking at the chart of the financial sector as measured by the Financial Select Sector SPDR (NYSE:XLF) shows where the sector broke down (white line) in early August. An oversold bounce could, in a best-case scenario, get as high as the retest of this line, although the $14 area may be somewhat more realistic.

XLF Chart

Two things are important to keep in mind at this stage:

1. Bear markets tend to have vicious countertrend rallies (call them oversold rallies if you like); and

2. Correlation between stocks in a downtrending market increases as investors run toward the exits all at once and selling decisions are made quicker than buying decision on average.

Another chart that indicates that this oversold bounce may have a little further to run is that of the transportation stocks as measured by the iShares Dow Jones Transportation Average (NYSE:IYT). Transportation stocks often can be used as a leading indicator at major turning points, but should also be watched carefully for the near term here. In the chart below, note that this group of stocks yesterday broke the most immediate downtrend and is also participating in the oversold bounce.  

IYT Chart

Let me be clear, the rally in recent days cannot be classified as anything more than an oversold bounce. Hence the charts discussed above should not be used as buying opportunities for anyone but the quickest of traders. For all others, this bounce should be used as an opportunity to sell stock into higher levels before the market likely heads back down again in the not-too-distant future.


Article printed from InvestorPlace Media, https://investorplace.com/2011/08/daily-stock-market-news-buyers-beware-what-this-rally-really-is/.

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