Post Fed Rally

Posted by downtowntrader | 12/16/2008 10:33:00 PM | 0 comments »

The markets reacted well to the Feds aggressive actions, extending on early gains. While I've been bullish for a while now, I can't help reminding myself that we are in a bear market and every rally is guilty until proven innocent. While there is certainly the possibility for more upside, the markets have also risen enough to meet the standards for a typical retracement. Most of the indexes are testing their declining 50 day moving averages as well as retracing 61.8% of the last leg down. However, there are some positive factors as well. First of all most of the indexes closed above their 50's after consolidating bullishly under the moving averages for a few sessions. Second, most of the indexes have had shorter moving average such as the 10 day cross over the 20 day. While this is not a magical clue that we are headed higher, it does reveal that the vicious downtrend from the past few months has slowed considerably. Third is the fact that all of this has occurred in the face of pretty bad economic data. While the markets tend to look forward, there is nothing in the current data suggesting an economic turnaround, so the fact that the markets are shrugging it off is bullish.

We are at an important crossroads, because there is the real potential for a large move to either direction right now. While a large bet in either direction can pay off handsomely, it could also be a disaster if you get caught in a reversal. There are plenty of landmines coming up such as options expiration and the pending auto bailout, so don't marry any position long or short.

Trade Carefully,