Stock Market 600 Point Crash.... Up

Dear Reader

Headline grabbing title?

The U.S. Fed raised the discount rate for overnight funding from 0.5% to 0.75% last Thursday evening which sent the financial blogosphere into a frenzy of anticipation of a sharp drop in stock prices the following day.... The Dow closed UP 9 points.

The current stock market rally has retraced 600 points or 67% of the decline that followed the January 19th peak of 10,729 to stand within touching distance of the bull market high. The velocity of the current uptrend in terms of price and time is precisely on par with the velocity of the downtrend off of the January high, which was one of the most anticipated and one could say delayed downtrends since the birth of the stocks stealth bull market. Everyone including bulls, bears and those yet to make their minds up clearly could understand one thing if nothing else that the run up in stocks to above 10,500 had lifted stocks into the most overbought state thus far which required a significant reaction lower.

For bulls the expectations were for a significant correction that at least targeted a retracement to 10k.

For bears the realisation was that this had to be it! It must be now (although never), that the bear market had now resumed its third leg lower.

The actual price action in terms of the forecast for 2010 as evidenced by 3 impulse swings so far of 2 down and 1 up, is inline with that for a volatile trading range for the first half of the year. Which does confirm my view as per the forecast for 2010 that the first half of 2010 is going to see a stock market behaviour greatly differing from that which we have seen during the past 10 months i.e. one exhibited by much greater price volatility within a very wide trading range, which is good for traders and a good for those seeking to accumulate off of the lows.

Another important point to consider is that the anniversary of the birth of the stocks stealth bull market is on 6th March 2010, this again suggests to me that despite stocks being so close to their bull market peak, stocks may in actual fact make an important LOW on this date.

Pulling all the strings together, the implications of the analysis are that :

1. Market volatility is very high - That the character of the market has changed and traders / investors need to realise this, which one could say implies less predictability during the first half of 2010 as impulse swings are much shorter in time and more frequent.

2. That the downtrend targets a LOW on or near the anniversary date of the bear market low of 6th March 2010.

3. That the target for the correction is for a move to between 9,500 and 9,800. The low of 9,835 implies price wise it could have occurred, but time wise it has not i.e. requires more downside time to dissipate the overbought state.

4. That despite the very strong rally to 10,412 from 9835 we have unfinished business on the downside.

5. Downside technical targets are between 10,050 and 9,800.

6. Upside Resistance is at 10,700.

7.That the forecast trend for the first half of 2010 is for a volatile trading range, prior to the Dow end of year target high of 12,500.

The above implies that we are likely to see a downtrend into the bear market low anniversary time window that straddles 5th and 8th March 2010 that targets a low in the region of between 10,050 and 9,800, which would in effect generate a double bottom chart pattern. It is tough to call a market downtrend BEFORE it has even begun, but that is what the analysis implies, off course where trading is concerned one DOES NEED to WAIT for entry triggers, which should become evident early next week.