Who Screamed Fire

The DJI gave up some 400 points or 5% in the last two trading sessions after it has gained more than 1377 points, or 21% from the March 9 close of 6547.05. The SP500 gave up 45 points, or 5.4% from last Thursday's close. Similar to the DJI, the SP500 gained more than 156 points or 23% from the March 9 closing level. For the Nasdaq 100, it also has gained more than 237 points, or nearly 23% from the March 9 close. The Nasdaq also gave up 60 points, or 5% in the last two trading sessions.

This bear market rally was one of the most anticipated rally in the recent past and before last Thursday, there was a high level of anticipation for the inevitable pullback after this tremendous rally since March 9 new closing low. When the pullback finally arrive on Friday and continued onto today's trading, the pullback was quick and sizeable. Take a look at last Friday's market action, 133 of the 143 points loss for the trading session were incurred at the opening minutes. Likewise in today's trading, more than 222 points of the nearly 250 points loss were incurred in the first few minutes of trading. These kind of pullbacks remind me of an analogy of someone in a packed theater yelled "Fire". When the dreaded scream of "Fire!" was heard, everyone in the theater quickly got up from their seat and exited at their nearest exit. Just like the market, someone screamed "Fire!" and everyone exited. Now the question is "Who screamed fire?" Someone that actually saw a fire burning or the local fire marshal decided to conduct a fire drill.

Is this pullback signal the end of the bear market rally or is it simply a consolidation before the rally resume? Lets take a look at the SP500. In the first chart, I have drawn the price channel this rally has been climbing in. As one can see, the angle of ascend for this price channel is too steep to sustain. If this is the channel that define this rally, then today's price break is a breakdown of the price channel and a new down trend will be established.



The next chart is a less steep price channel using 780 as the support level for this pullback.



And finally,



using the November low at 740-750 as support level, this price channel is the widest of the three. How this pullback will play out is depended on which price channel define this bear market rally. If the most narrow and steepest price channel define this rally, then when the SP500 fail the support level at 750, it will signal that the DJI is heading down to a new market low. But if either one of the other two price channel define this rally, then look for further upside from this bear market rally before it ends.

Similar scenarios for the DJI and the Nasdaq 100.





So who screamed fire? Is there a fire or is this a fire drill. The market will tell us as it retrace to various support levels whether this pullback is a consolidation or a new down trend. Pay attention to the support levels for direction.