Wednesday

The Anatomy of A Rally

3 Comments March 18, 2009 – 11:35 am |   | Permalink |  Print This Post |

This is a follow up to our previous analysis “The Anatomy of a Crash” which is currently the most popular article on TheInflationist. Today is Day 8 since the market bottomed - we have seen almost 8 up days (at least no significant down days). You do not have to be an expert to start calling for a top - whilst many have shorted prematurely and are currently in despair as they watch markets defy gravity day after day and their accounts flashing red. Do you cut loss at this point and spare yourself further financial and emotional grief? And for those celebrating having picked the bottom (or have long positions above this level such as ourselves), when do we close out before potentially giving back all the recovered losses? Amazing how the tides turned. Markets are as immune to bad news as they were resistant to good news during the recent decline.

TheInflationist analyzes all primary* rallies (*our terminology is not to be confused with Elliott Wave terminology - primary refers to the first upwave after a significant decline in this case) since January 08.

1. January 2008 Decline: 1933 points  (13567 - 11634)

Primary Rally Statistics

• 1143 points = 59% of decline (11634 - 12777)
• Time to peak: D8
• Touched 30 day MA
• Decline after primary rally: 62% of gain over 6 D (711 points: 12777-12066)

2. February 2008 Decline: 1046 points (12773-11737)

Primary Rally Statistics

• 575 points = 55% of decline (11737-12312)
• Time to peak: D2
• Below 30 day MA
• Decline after primary rally: loss 97.5% of gain over 3 D (561 points: 12312-11751)

3. March 2008 Decline: 1035 points (12755-11720)

Primary Rally Statistics

• 917 points = 88.5% of decline (11720-12637)
• Time to peak = D9
• peak > 60 day MA (60 day MA at 12450)
• Decline after primary rally: loss 51.2% of gain over 4 Days (470 points:12634-12164)

4. July 2008 Decline: 1784 points (12600-10816)

Primary Rally Statistics

• 935 points = 52.4% of decline (10816-11713)
• Time to peak = D6
• 60 day MA > peak > 30 day MA (30 day MA at 11593)
• Decline after primary rally: loss 63% of gain over 3 D (588 points: 11713-11125)

5. October 2008 Decline: 3315 points (11202-7887)

Primary Rally Statistics

• 2000 points = 60.3% of decline (7887-9887)
• Time to peak = D3
• peak < 30 day MA (30 day MA at 10461)
• Decline after primary rally: loss 86% of gain over 2D (1726 points:9884-8158)

6. Late October 2008 Decline: 1950 points (9920-7970)

Primary Rally Statistics

• 1685 points = 86% of decline (7970-9655)
• Time to peak = D7
• peak > 30 day MA (30 day MA at 9177)
• Decline after primary rally: loss 128% of gain over 14 D (1726 points:9655-7492)

7. November 2008 Decline: 2168 points (9660-7492)

Primary Rally Statistics

• 1372 points = 63% of decline (7492-8864)
• Time to peak = D7
• 60 day MA > peak > 30 day MA (30 day MA at 8660)
• Decline after primary rally: loss 54% of gain over 3D (744 points:8864-8120)

Current Decline:  1870 points (8350-6480)

Primary Rally Statistics (at DJIA 7400)

• 920 points = 49.1% of decline (6480-7400)
• Time to current = D8
• peak > 30 day MA
• Decline after primary rally: ?

Conclusion

• March 2008 was unique/strongest: longest rally (9 days), above 60 d MA (every other primary rally was less than 60 d MA), decline after peak was the least (51.2%)
• Upside of primary rally based on historical range of % recovery: 7460-8134 (52.4 - 88.5%)
• Max no of days to peak: D9, March 2008 (we are now at D8)
• Using March 2008 (ie strongest rally) as a guide, projected max upside is 8134, pullback at 51.2% (ie least pullback) projected at 7287.
• So at current 7400 levels, it would be SAFE to start shorting lightly with reserves to support max upside of 8134. We are not recommending shorting now, but for those who have shorted above 7287, you will at least be able to get out breakeven.

Copyright 2009 by TheInflationist

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