D.B. Hi Ike, how are you doing?

I.I. Fine, thank you.

D.B. Since the last time we talked, the SP has not made much progress, but NASDAQ has soared. I was watching CNBC the other day, and it felt as if the mania days never left! Is this rally destined to disappoint?

I.I. To answer this, I have to rely on  the "technical signature" of the market. There many types of markets, each type has its own characteristics. If you are examining two markets and you find out that they share  the same exact characteristics, then it is safe to assume that they are the same type of market.

D.B. What do you mean by "technical signature?"

I.I. The way the  indicators behave  when they are subjected to market action.  Same type of action, same type of markets, cause indicators to act the same. In the past 3 years we had two spectacular bear market rallies, one  in April-May '01, and another one in Sept.'01-March '02. The first one lasted 8 weeks, the second one lasted 24 weeks. The interesting part is that both markets gave the same indicator readings during the first 7 weeks, then the  April-May rally abruptly ended on 5-24-01, and it kept falling into the September lows. On the other hand, the rally from the September lows, moved sideways to slightly higher after its seventh week, and it did not end until 3-18-02, and from there the market kept falling  for the rest of the year. In part B, I'll go over all of our indicators, and it can be seen very clearly how both rallies behaved for the first seven weeks like identical twins! Now, let's enter the latest rally, the interesting part, is that during the past  seven weeks, it has acted exactly the same way as the previous two bear market rallies did. To make my point, I'll show a couple of the indicators now, and we'll cover all of them, in part b.

These two indicators measure supply and demand, they show if the pressure is on the buy side, or, on the sell side. They show distribution/accumulation. A declining BSE and a rising market implies selling into the rally/distribution. Notice the  pattern after the first seven weeks of the current rally, and the patterns after the first seven weeks of the other two large bear market rallies. They are almost identical, aren't they? The current rally is doing exactly what the other two did the first seven weeks. I would say Distribution/accumulation patterns are the same between all three rallies. 

The next indicator is our Thrust Oscillator which measures the "thrust" of a move. Notice the similarity in patterns, intensity, even the divergences are identical!

Take a look at the Summation Index of the 10 day Oscillators. This is an aggregate indicator made up of several 10 day oscillators which measure  correlated values. Again, the action, the divergences, the magnitude, they are  the same for all three rallies. The same holds true for the rest of our indicators. 

Therefore, if the current rally causes our indicators to behave exactly the same way, as they did when measuring the other two bear market rallies, I must conclude that -at the very least- this current rally is acting in a manner consistent with bear market rallies.  If it acts like a bear market rally in every way, then it must be one. This is not a matter of personal opinion, it's  matter of looking at almost identical pictures, and concluding that they depict the same thing. I can't fathom this being a  bull market rally, that for some reasons is acting like a bear!

D.B. What is the implication of this?

I.I. This rally has acted during its first seven weeks, exactly the same way as two previous bear market rallies. One of them lasted 8, weeks, the other lasted 24 weeks. So, I can't help it but to wonder, is the current one going to turn out like the April-May '01 rally, which means it will end next week, is it going to turn out to be like the Sep.-Mar'02 rally which lasted 24 weeks, or, it's going to do something totally different?

D.B. What do you believe?

I.I. Actually, I do not need to know in advance, although it would make things easier! I already know, that all the evidence in my disposal suggests that this is another bear market rally, like the two previous which may roll over rather quickly, and in this case I should be short, or, it may have another leg up, of equal magnitude and duration, and I need to be long. In the end, it doesn't matter which way it goes, what it does matter, is that we have in place alternative strategies. 

D.B. So, what are you going to do?

I.I. If the rally is going to end in the next few days, then two things will take place inevitably, a) the SP will close below 885, and then when it attempts to rally, it will make a lower high, at the same time, our Quantifiers, Trend Indicators, and BSEs will turn negative. At that point, I'll initiate a 30% short position. I'll add another 30%, when it closes below its 20 day SMA, and another 40%, if and when it closes below its 50 day SMA.  I'd cover 30% of the position at 825, and then I'll re-evaluate. 

On the other hand, if it is going to rally, then then we should see one more pullback, but the SP will not close below 895, while at the same time, our Quantifiers, Trend Indicators, and BSEs will remain positive, and the Thrust Oscillator will have a positive cross over. At that point I'll open a 30% long position with a stop at 892. We should see something similar to what I drew on this chart. Then I'll add another 30%, once it closes above the high it pulled back from. 

Last, but not least, we have to consider that for some odd reasons, this develops into a much bigger bull move, in that case, we certainly want to know where our additional entry points should be. For that, I'd use a chart provided by Mr. Tim Sharp, Tim does some very thoughtful and interesting work, and people can find his postings and charts for free  by clicking HERE 

If for some reasons,  this rally morphs into cyclical bull move, then it would make sense that it follows Tim's count. In that case, we will be adding at point 2, and at point ii.