Rally Still Underway

(Click To Enlarge Chart)

The rally from the low of March 17, 2008 is still underway. I am amazed at the wide range of opinions regarding the potential for this rally. They range from its nearly over with the the bear resuming almost immediately to the markets are going to soar to new highs before the summer is over. Most of these views seem to be backed up by rational arguments, but can such speculations really help us to make money in the markets? Possibly, but they should be used to help see the range of probable outcomes rather than for taking actual positions. Trading positions should be based on what the market is doing and has done instead of what we think it will do.

Presently, the rally is intact. It may end tomorrow, but for now it is still going up. A look at the chart above shows two very important facts that underscore the current weakness in this rally. One, volume is below average and average volume is falling. Two, on balance volume is not confirming. In other words, this rally does not have the institutional support to go too far. That doesn't mean that it cannot pullback and blast off, but that would not appear too likely at the moment.

From a cycles perspective, we are currently in the first half of the 9 month cycle which bottomed on January 24. The March low was not the cycle low. We should expect at least a mild correction of this rally to ensue sometime by late May to early June with a bottom most likely in late June. If that bottom is a lower low, it would be particularly bearish. If it is not a lower low, then we should expect a higher high in July or August to end the rally. If that high is a new all time high, that may or may not be all that bullish, but it most likely will not be a new all time high. I would expect the bear market to resume in full force after that late summer high.

From an Elliott wave perspective, the rally appears to be corrective, and while some are already saying it is nearly over, there are several possible paths to a late summer high.

May 1 tends to be a strong up day. So, with the above in mind, even though the trend following indicators are long, it would be prudent to begin taking profits after May 1 to May 5. While at the same time, it may not be prudent to load up on shorts at that time.

I will be posting my current view on the 9 month cycle in the near future. Later on, I will be discussing how to take profits.