"To understand is to perceive patterns." --Isaiah Berlin
It is difficult to believe, but the market is rallying again this morning on news that Greece is saved. This time the bulls are celebrating the fact that the bond-swap deal, which we have rallied on many times previously, is likely to be completed.
Wednesday I wrote about how this market has had a strong tendency to bounce straight back up after an ugly day of selling like we had on Tuesday. The folks who are too quick to anticipate a failed bounce have consistently found themselves being squeezed as we don't pull back the way technical patterns tend to suggest.
The excuse for the buying this morning is almost absurd but the behavior itself is not at all surprising when you look at the patterns in this market over the last few years. The issue now is whether we just keep going, like we have so often, or does resistance matter this time as we run back up to key levels.
If we open at current level, we completely fill the gap created by Tuesday morning's very weak open. The S&P 500 close on Monday night, which was 1364, was the key overhead resistance level, but once we regain that we are again looking at the recent highs at 1375 or so as the key levels.
Since the low in March 2009, the market has had two tendencies that are interrelated. The tendency to rally in a straight line with very few pullbacks and the tendency to bounce in V-shaped fashion. What makes this action so tricky is that the normal ebb and flow of human emotion is missing. Instead of real live human beings debating the pros and cons and creating indecisive behavior, we just go from one extreme to the other and there is seemingly no memory from day-to-day, as Doug Kass often states.
I blame this behavior on the increased dominance of computerized trading. What the computers attempt to do is exploit the emotions of the few human traders that are left and then they feed on their action once they are in control and driving the trend.
I suspect that the computer programs were set up to try to squeeze us higher as the bears started talking about shorting yesterday's dead-cat bounce action. The Greece news provided a bit of an excuse but the algorithms pressed their edge further, which created more of a squeeze.
You can be sure the bears will be looking for this market to roll over after this gap up open. We may very well roll over again but I'll be surprised if there isn't some strong underlying support.
The toughest thing about this sort of action is that it doesn't create many good individual charts. We have many stocks that suffer a breakdown and then bounce back on low volume into resistance, which isn't a very compelling formation. Ironically, that keeps the bulls underinvested and gives the market even better underlying support.
We'll see how well this gap up open holds as economic news rolls in but don't be surprised if the V-shaped bounce continues.
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