Tuesday, March 17, 2009

Close to Resistance, What's Next?

Top Line: The market defied gravity on Tuesday with the Dow rallying 180 points. Next up is some powerful resistance directly overhead. Let's see what can happen next.

The one drawback to today's rally was the lower volume associated with it. To us, that is not a huge negative on a day like today. Let's take a look at why.

We think it is "easy" for the market to travel between two non-essential points like the last low and the last high; but, to move below the last low or above the last high is a difficult maneuver indeed. Today the market moved up to the last significant high and did it on low volume. That could mean the world's traders have decided to wait until the resistance levels just to see what might happen after that.

Let's say the market can penetrate the boundaries above. To confirm the break, we should see a powerful day on heavy volume. Since the Dow has run up over 900 in the last seven sessions, we wonder if it has the strength to break through on this particular attempt. Remember we were expecting a down day today and we had a big rally instead so the market has some room to move down without any damage to the main trend (which seems to be Up now).

The important thing is that we are not only expecting an eventual break of these resistance points, we are expecting a huge rally going into the fall. The nearterm movements are only meaningful if you have not been fully invested. Then these movements may give you opportunity to get in. We hope you haven't waited until now.

Just for the record, the resistance levels are 780 in the SP500 and 7405 in the Dow. Any serious break of these numbers on volume will likely mean the market will move up quickly from these levels.

Son, thanks for the comment in yesterday's post. Great.

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