Rally Breaks Down Trend – 07/19/11 © ™

Today we had a good rally following yesterday’s 90% down day.  The rally was so strong, 85% up day and Dow Industrials up 202 points, that it ended the downtrend since July 7.  Going forward the rally must have legs to be meaningful, otherwise it will be another flash and fade.

It’s typical for the stock market to climb the “wall of worry” and most of our best rallies have occurred climbing the wall of worry.  So if things look really dismal and the stock market continues to rally, it’s likely that a solution is in the works.  It’s just hidden at the moment.

07-19-11 DJ INDUSTRIALS 5 MINUTE BARS

If the market continues to rally, it should indicate that we have begun step 3 up dating from the June 15th bottom.  Small step 3 should carry above the July 7th high and a significant move above the May 2nd high would likely mean that large step 2, which began in July 2010 was still in force.

If we fail to make a higher high above the July 7th high, it would mean that (1) we have begun a significant trend change to the downside, or (2) we may need one more step down to complete the bottom.

If the dates and steps are unclear to you, please see last Saturday’s weekly update for the step labels (summary section).

I had remarked yesterday about the possibility of a whipsaw reaction and selling prematurely.  Whipsaws are a frequent problem with short term forecasting.  Since the market turned at the point of support (SP 500 1295), a sale was not executed.  It’s the nature of the beast that the market loves to worry investors and shake them out prematurely.  It’s our job to be reasonable and not act with emotion and that’s easier said than done.

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