Sunday, January 25, 2009

End of the Month Rally Due

Top Line: The stock market struggled to go down on Friday and that alone could lead to a strong rally coming up in the next few days.

After a valiant attempt to go lower and the lastest Bad news, the market rallied out of the depths. We have been watching the market trying to get below 8000 for four straight days. Every time we get under 8000, buyers come in to hold that line. We don't think 8000 is a particularly important number but the market does seem to be holding the line here.

The market had tried to go below 8000 back in October and November of last year and it couldn't stay there at that time either. We think the sellers are about done for now at least. After a three week decline in prices, the bears are out of selling power. Check this article from CNN Money. The whole article is bearish even though every possible item is "expected" to be bad. If the market expects it to be bad, then it's already been priced in.

Let's go back to Friday's action which seemed pretty commodity friendly, particularly in the precious metal arena, where gold exploded for 40 bucks. GDX got chased up over 8% to the low 34 range after getting as high as 34.67 during the day. That is the highest the stock has been on this up move that started back in late October, under 16. Back in our January 14th post, we mentioned GDX being around 28...a good buy then. Now, it's up 20% from there.

The 200 day SMA (simple moving average) for GDX is sitting right above it around 36 and that should be some resistance for it; but, with the 50 day SMA moving up it's only a matter of time before the stock breaks through the 200 day SMA and starts to pull it up. Looking at the 50 day SMA is one of the clues that the drop down to 28 was a good buy. That was just above the 50 day line and the 50 day line was moving up.

We think the stock market has the power to jump 20% in a couple of weeks, too, just like the GDX. It's true that the 50 day SMA for the Dow is still moving down and the Dow is under it. There are so many other signs that the market is ready to go up now. We have mentioned them in several of last week's posts but we mention our favorites here again, the drop off in the Treasury bonds prices and the height of the volatility indexes.

Happy New Year to our Chinese friends.

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