I asked Don Vialoux if he thought the recent rally was convincing.
Question: Don, the DJIA’s rally looks suspicious. The volume has declined each time the index has gone up. Does this mean the index is base building? Is it vulnerable to a correction back to support lines @ 7,449?
Answer: Hi, Chrispycrunch. I would love to confirm that the November 20th lows set by most major North American equity indices was the bottom, but insufficient time has lapsed to make that call. Lots of volatility in both directions.
Equity markets continue to respond irrationally. Meanwhile, glimmers of hope continue to surface. Sector rotation with positive breakouts above base building patterns have occurred during the past few trading days.
The first sector to break was gold. Utilities started to break earlier this week. Infrastructure started to break yesterday. U.S. energy surprisingly is close to breaking out (e.g. XLE). On the other hand, credit conditions remain frozen in the U.S. The yield on 10 year U.S. Treasuries touched an all time low yesterday.
Best guess is that the November 20th lows likely will be tested in early December(possibly a 50% retracement of recent gains as tax loss selling pressures take hold). Chances of a year end rally are above average this year. Favourable anticipation of the U.S. regime change on January 20th will help the bulls. The annual re-balancing of balanced funds and pension plans late in December and early January will help equity markets.
The big question is, ” Will this next intermediate upside move be a recovery rally in a bear market or the start of new secular uptrend?”. At this stage, Tech Talk is leaning toward the former scenario. The charts will let us know. I have a hunch that “Timing the market” by playing intermediate swings lasting 2-8 months will become more important during the next few years.