Wednesday, March 25, 2009

How Rapid Is This Advance?

Yesterday, Mark Hulbert posted an article on Marketwatch about how the rate of the rise in the current rally has been far faster than the average for bull markets over the last 100 years. He concludes that this is a hallmark of bear market rallies and compares the current rally to the first major rally in 1929, which he says only lasted a few months rallying 48%. (48% is nothing to sneeze at.)

I agree that the rate of the rise in the current rally has been extreme. I compared the gain in the QQQQ over rolling two week periods (on a day by day basis) and calculated that the gain to date since the March 9 low is 3.5 standard deviations above the mean for such periods over the last 10 years. In fact, the gain has exceeded the average rolling annual gain on a day by day basis for the last 10 years.

This is both an indication of the initial thrust of the rally and a warning that a reversion to the mean is probable. It is extremely rare that such a pullback does not occur, but once or twice in a decade it doesn't, and for that reason I will look to go long a half position in the UWM on a breakout above Monday's high. Nevertheless, the probability of a sharp reaction of 1 to 3 days is increasing and would be an opportunity to jump on board the trend.

On comment:

With regard to candlesticks, I cannot offer much advice. Most studies that I have seen do not suggest much of an edge. I have found that understanding how to read fractal pivots as described by Bill Williams to be much more rewarding. The IWM has formed such a pivot above the 50dema as of today leading to my decision go long on a breakout. A note of caution on CME: it is approaching upper channel resistance and 200dema resistance, although 3 month highs are a positive. Best of luck.

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