Thursday, March 12, 2009

A Shift to the Bull or Bear Trap for the Unwary?

If you click the chart of the S&P 500 Index (SPY) above, you'll see that, since September, forays above the 20-day moving VWAP line have been short-lived. With today's continued rally, we're now peeking above that level.

A hallmark of a downtrending market is that sharp short-covering rallies serve as opportunities for further selling by the bears. It is how large institutional traders respond to market strength that determines whether this is a rally in a bear or the start of a bottoming process.

I will be following the Cumulative TICK, new highs/lows, and sector strength to gain some clarity on this issue. To this juncture, rallies above the 20-day VWAP have been bear traps. Will the November support now act as resistance and keep us in bear mode? Or can we sustain prices above that level? As long as retracements are shallow--like we saw yesterday and this morning--we have to respect the rally and the clear strength in the Demand/Supply numbers. I'll be updating those numbers tomorrow morning before the open via Twitter.