S&P 500 - March 12, 2009

charts courtesy of stockcharts.com

Index pulled back a little at the open, but soon recovered and powered on past our 734 pivot.

The action was markedly positive and broad based. Breadth was very good. Waves so far have been very clean. There was an end of day rally that had a sense of urgency about it. It could easily be counted as a follow through day.

Short term momentum has registered most overbought readings in quite a while. We are now seeing some short term negative divergences.

Let's review wave scenarios again.

Either the 666 low was the end of the Primary wave A, in which case, we are riding the first wave of Primary B rally that should ideally carry the index past the 800 mark in coming days and weeks.

Or we are seeing a ferocious 4th wave. Corrective waves can evolve in different patterns. It might be an irregular flat with the B end being the 666 low. It might also morph into a complex pattern.

So far, judging by the series of short term higher highs and higher lows, upside momentum and breadth, the weight of evidence is on the side of Primary B rally.

I cannot call it in until I get a confirmed mid-term uptrend. So, I need to stay open, and take it one pivot at a time.

Let's take a closer look

The latest part of the advance is taking place in a tight channel. This type of structure usually happens near the end of a strong wave. Sometimes there is a final throw-over before it finishes. There is no saying how far they can extend. If I were long I would enjoy the ride till it would decisively break. If I were waiting to short, I would keep waiting for it to break.

Looking at the 60-minute frame

We are seeing most overbought readings in quite a while. Also, notice that index has moved out of another channel. We will hear from perma-bears that this is all because of shorts being massacred, and that may very well be, but an uptrend has to start from somewhere.

Daily technical picture has improved as well. We now have a MACD buy signal.

Index is now in the 740-750 area which should provide a first serious test for the bulls. After that, the 800 area should provide some formidable resistance.

So far, the action has been very good. It has blasted through a number of pivots. It must have cleared the system from a lot of late shorts. Let’s see how the index behaves when we finally get a meaningful pullback, and yes, we will get that pullback.

Breadth has been very good. We have very solid positive divergences from November lows.

The only nagging part is that we still made more new lows on NYSE than new highs. This must abate, and eventually change, or it will cast a cloud of doubt on the rally.

It’s been a good and powerful start. It is up to the bulls to not squander this.

Since we do not yet have a confirmed mid-term uptrend in place, we will pay attention to our pivots and see if support holds. Again, we shall play it one pivot at a time. We will pay attention to wave structure, we would want waves like we have had these past few days on the way up, and chop-chops on the way down. Genuine, lasting rallies give little back on pullbacks, and gain quite a bit on advances. Genuine, lasting rallies get overbought and stay ovebought.

Long time readers may remember that on September 26, 2008, I posted a piece about analyzing the markets. If you have not read it, please indulge me and do so. It will tell you how I regard market analysis.

Take anything anyone says – especially me – as opinions only, regardless of how often we might have been right in the past. None of us knows the future. Some of us admit it, some don’t. Only liars and bubble-heads are right about the market all the time.

VIX has also been cooperative with the rally

Next week is, as my friend Bill Zimmer of prudenttrader.com reminded me, a quadruple witching expiration day. It may get very volatile, especially with armies of bears having waited for a spot like 740-750 on S&P 500 to re-short

We will see how VIX behaves when it reaches 37-38 support shelf. If it drops below, it will put a lot of pressure on option buyers, and will create a boon for sellers. Next week may become a lot fun to watch.

Short term trend is up, mid-term trend and long term trends are down.

Resistance 750 and 768, support 734 and 717.