22nd April 2005

By Tom Hougaard

                                                        09.58

PLEASE PRESS "Refresh" BUTTON ON INTERNET EXPLORER TO CHECK FOR UPDATES

 

Good morning,

It is quite obvious that there is degree of scepticism about the rally in the US last night. Nikkei was called up 200 points but is currently only up 65 points. The DAX is only up some 30 points, which is less than 1%, even though the Dow rallied 2% last night.

I spoke about looking for a rally yesterday, but I would have preferred to see it start next week. It is always difficult to analyse a market which rallies without having made any kind of reversal pattern the day before. The weekly and monthly charts are still bearish, and whenever you see a sharp rally, which goes counter-trend, there always will be scepticism.

The entire area from 1163 to 1180 in the SP500 will be massive area of resistance. If this was the culmination of a 4th wave climax we should see the market move up uninterrupted into the summer and take us to new highs for the year. We will need to get above 1191 on the monthly chart for this to happen.

I doubt that the bulls will fail here without testing 1163. I had a look at the statistics after a strong rally in the Dow. It is not very often the Dow rallies more than 1.9% in one trading session. What can we expect after such a strong day?

 I filtered out everything before 1990 and asked what is the chance of higher prices the day after a day where the Dow has rallied more than 1.9%?

There was 86 days in total since 1990 where the Dow closed up more than 1.90% on the day.

The day after we rose 42 times, and we fell 44 times.

The average gain was 0.6% while the average loss was 0.8%.

I think most people would expect higher prices the day after such a strong performance but the statistics tells a different story.

I have written about Delta from time to time. The short-term cycle works on a 4-day rotation. It is really interesting to note that whenever the 4th day falls on a Friday you get a very reliable pattern. The day before tends to be a strongly trending day. The day after, today, you tend to get either an extreme climax on the pattern, and then a reversal, or you get a strong counter-move and spike back in the direction of the trend the previous day. I have attached some example for you of the price action in the Dow over both days from the past. The red line in the middle splits the two days. You should be able to get an idea of what I am talking about.

 

           

           

    

 

I still want to be long above 1161 in the cash market with a tight stop. Position shorts can probably be established below 1150. Given the pattern I have discussed above, it is a possibility we will see an open either up or down, which will then reverse quite powerfully.

I think I will call it quits here. It is my day off and the sun is shining.

I hope you will have a nice weekend.

Tom