A Countertrend Rally

I want to write about market structure this morning because there are a lot of crosscurrents that are useful to understand. The first point I want to make is that the primary trend is still down. Due to inflation that is likely to be far from transitory, the overvaluation of the mega-cap tech stocks that dictate the performance of the major indexes, and now potential geopolitical disorder, the S&P, and Nasdaq are still in the early stages of a long bear market. (A caveat: speculative growth is much closer to the bottom in my opinion as I wrote about in “The Bifurcated Market II”, 2/19).

The big difference between today's reversal and the reversal on the 24th can be summed up in one word...

PANIC!

We saw it today, but not on the 24th.
$SPY pic.twitter.com/b6YfhhYv56

— Brian Lund (@bclund) February 24, 2022

Nevertheless, yesterday’s massive intraday reversal was the mirror image of what we saw when the market topped on November 22 (as I wrote at the time in “Huge QQQ Intraday Reversal Suggests The Top Is In”, 11/22/21) and marks the beginning of a countertrend rally. Despite quibbling by some bears, I agree with Brian Lund’s tweet that that was capitulation at the open Thursday morning.

(Click on image to enlarge)

That said, due to all the fundamental headwinds mentioned at the outset of this post, I don’t see too much further upside for this rally. I think we’re probably now in a range between 13,000 and 14,000 on the Nasdaq and – though I don’t know what the catalyst will be (Fed, inflation, interest rates, geopolitics) – my guess is that it will be broken to the downside eventually. What this means as far as positioning is that I don’t really see a huge trading edge long or short so I’ll be unloading my long trading positions in ARKK, QQQ (see “Buy The Invasion”, 2/24) and a couple of others at the end of the day today.