Wednesday, November 28, 2007

Why Is This Day Different From All Others?

Today was a very solid day in the market. Some investors are likely wondering if this is just another oversold rally that will fade? Fair question, but there are some things that feel different about today.

This was the first time the market staged a 2-day rally since October 29th. Volume rose substantially today, making it another accumulation day as well. Moreover, this was the biggest 2-day rally in the S&P 500 since October 2002. Does that month ring a bell?

I have been talking incessantly about the Yen, and how we needed to see its uptrend halted. Today was a step in the right direction, as the Yen ETF (FXY) gapped lower and has been down 2 days in a row. Here is the chart:

In technical terms, the gap lower today left was is called an "island gap". You can see those last 4 days that look like a small island left floating near the top of the chart. The last time this happened was in mid-September, just prior to a nice rally in the market. Further weakness in the Yen would be very bullish for the market.

Another indicator that caught my attention was the volatility index (VIX). The VIX also gapped lower today, a good sign. The VIX has been in an uptrend, while the market has been slipping lower. Today looks like that uptrend has been broken. Again, a lower VIX should correspond with a rally in the market the same way it did back in mid-September.

Despite the strong rally, retail option players remained bearish. The ISEE Sentiment Index finished at the depressed level of 96. This indicates that there are still plenty of bears left to be converted and help drive stocks higher.

And leading stocks had very strong bounces, another good sign. Look at the outsized moves in names like RIMM, ISRG, GS, NYX, FLWT, POT, AAPL, BIDU, SPWR, WFR, etc. I am not calling for smooth sailing from here. It's never that easy. But I already called a bottom last week, a few days early it seems. The market held above its August lows, and I still do not think those lows will be broken.

BIA has long positions in RIMM, GS, NYX, FWLT, AAPL, SPWR, and WFR


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