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Market Rally Driven By Technicals.

  • Written by Syndicated Publisher 48 Comments48 Comments Comments
    September 1, 2011

    Is it really possible to sort through the surrounding noise of individual economic reports, opposing opinions of whether QE3 would help or hinder, opinions of whether or not the economy is slowing into recession, whether or not the European debt crisis has been successfully kicked down the road, and on and on, and come up with whether the stock market will rise or fall with any degree of confidence?

    For instance, we’ve all heard the various explanations of why a market rally began last week.

    It was because the economic slowdown of the first half is ending. Or it was because the economy is worsening and the Fed will have to come to the rescue again with more stimulus. Or it was because the 18% decline in the S&P 500 has it selling at ‘only’ 14 times earnings, just about its long-term average, making stocks a bargain. (Never mind that it has sold at only 8 to 10 times earnings near the bottom of some market declines).

    The global rally continued yesterday supposedly on relief that hurricane Irene did not cause quite as much damage in the northeast U.S. as was expected. That would be a reason for markets in Asia and South America and Europe to also rally strongly again yesterday?

    No. The answer is in technical analysis. Markets around the world had simply become short-term oversold in the decline after our intermediate-term sell signal of May 8, and were potentially due for a rally to relieve that oversold condition.

    And then technical indicators like the short-term Relative Strength Index signaled the beginning of the rally by showing the instant that money began to flow into the market rather than out.




    So technical analysis guided the way into the intermediate-term correction and back out for the oversold rally.

    Now the question becomes what happens next. Will the correction resume once the rally has alleviated the short-term oversold condition? Or is the short-term rally the beginning of a new leg up in the bull market?

    I don’t think that can be answered simply by trying to wade through the noise provided in opinions regarding the economy, the Fed, the debt crisis, either. Technical analysis will play its important role.

    To read my weekend newspaper column ‘The Fed Is Willing To Risk A Recession This Time!’ click here!

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!