Tom Scollon
Tom Scollon
Chief Editor

What do you make of the recent rally - bear market rally or start of a new sustained bull run?

As per usual there is not crystal clear answer – we can only postulate – and even then we can only talk probabilities. Certainly the 7% move on the DOW early in the week fired up equity charts worldwide. Our charts came alive again – and of course volatility started to rear its ugly head.

Over the last three weeks I have taken the line that what we have been seeing is a traders rally. And certainly over the last couple of weeks we have seen a solid increase in volume and this is typical of any rally off the bottom as we especially see short covering. That is, those who are holding short positions have to sell them and thus need to buy back shares. And often this is in a mad scramble and they pay sometimes very dearly to buy back in again. So to what extent has the continuing rally been short covering?

The evil thought crossed my mind, also three weeks ago – would we now see hedge funds give up the beach and get back to their trading desks to make some quick easy money. And I think they did but my cynical mind is now waiting for the Hedgies to start selling down. I mean really and truly are they committed to this rally? Do they have an intrinsic interest in a sounder economy? Are they trying to whip up positivity so that we may all psyche ourselves into a recovery by some worldwide mass mind focus on an economic boom?

If the Hedgies start to sell, who will be their buyers? Yes you guessed it the retail investor. You know those who think they are missing out on this rally. And the cycle starts all over again.

Each day I ask myself in my analysis – ‘what if I am wrong’ so I challenge any comfy thinking. But still the majority of charts I look at point to a sell down at some point. This is the DOW and typical of what I see:

click chart for more detail
click to enlarge

Yes another leg down. I also like to test the soundness of volume by looking at OBV – On Balance Volume. And what I see in the above chart is divergence. That is, price is going higher but OBV is heading lower. Buyers are running out of puff, shorts are covered and the retail investors are buying up the Hedgies positions. It gathers pace then as the shorts come back again because they know that as much as all news is good news at the moment this bun fight is far from over.

Come in spinner.

Enjoy the ride

Tom Scollon
Chief Analyst