New Bull or Secondary Reaction?

TREND ANALYSIS 101: An uptrend is defined by prices that form a series of rising peaks and rising troughs (higher highs and higher lows). In contrast, a downtrend is defined by prices that form a series of declining peaks and declining troughs (lower highs and lower lows).

A downtrend is considered valid until a higher low forms and the ensuing advance off of the higher low surpasses the previous reaction high.  

This is the chart I showed a couple posts ago w/ major levels acting as resistance. Refer to my prior post. I added the bollinger bands and 21d ema to this one. We got a nice break-out on decent volume Friday from a bullish pennant to close above the 8000 level. Fantastic. Fact: the DJIA, although rallying 1500 points (6500 - 8000) is only back to where it was trading in late January/February following a precipitous decline from September '08. Now we're only back to where we were before the 2nd horrific plunge in February/March to 6500. Ouch!! 

The  issue is whether this curent rally is the beginnings of a new bull market? My answer is that it might be, but it's  too early to say. It appears, from where we are standing now, that the low was put in on March 6th at 6469.95, but one never knows for sure. At least not yet. It will take some more time for the market to tell us and provide an all clear signal to re-enter with having the odds on our side. If it is a the beginnings of a bull market, there will be plenty of time to get in. Otherwise this is going to be one hell of a sucker's rally in a bear market. So far, other than various pundits opinions (like Craemer), media cheer leading, and a strong 4 week rally, there isn't enough for me to join the ranks of the bulls. I'd rather be late than sorry. A couple of things I'm concerned about. 1) heavy resistance of Jan/Feb (circled) corresponds with the upper Bollinger Band. This is a heavy resistance area where buyers came into the market before they got crushed. They are now back to break even and a lot of those buyers will see this as a good time to lighten up on some of those positions. 2) the Dow sold off from 9000 down to 6500 or 2500 points. It rallied back to 8083. The 66% retracement level from the bottom is 1650 points or Dow 8150 which corresponds to the upper bollinger band at 8200.  Conclusion:  this could easily be a Secondary  Reaction in a bear market. 3) Bottom Line - there is lots of overhead resistance  at 8000 - 8500 in the short run at least. 

Dow Theory historian and practitioner, Robert Rhea (google him if you are interested in this) postulated back in the 1930s that: 

there are 3 movements on the averages, all of which may be in progress at the same time. The first and most important, is the primary trend - the broad upward or downward movements known as bull and bear markets, which may be of several years duration. The second, and most  deceptive movement, is the secondary reaction: an important decline in a primary bull market or a rally in a primary bear market. These reactions usually last from three weeks to as many months. the third, and usually unimportant, movement is the daily fluctuation. The Dow Theory, Barron's 1932

Does this look like a new bull market to you? It doesn't to me. Sure the March 6th low looks like a blow off. But are you ready to go all in? I'm not. Take a look at the simple definitions above. Do we have rising peaks and rising troughs? Not yet, but we might. Has a higher low formed with an ensuing advance off the low above the previous high? Not yet. 

I'm going to wait for this evidence to form and build on itself before I'm ready to say that the primary trend has shifted from bear to bull. I want the evidence to build one brick at a time. When it does, I'll shift,  bet accordingly, and make a lot of money in the process. If it's a bull market that over time trades back to the old 14,000 highs, and moves onto 17,000, 20,000, and 22,500 on the Dow, there will be plenty of meat even if I am a little late. It's OK not to jump in here because the bull is starting to run away. I'll take my time. I feel it's better to be safe this go around, then take another sucker punch to the face if in fact this turns out to be a reaction in a bear market. 

On a correction look for the converging 55d and 21d emas to hold. After that look to old resistance new support at 7500, and wait for the market to tell us where it's going. That means waiting for the next low and ensuing high. The market will lead the way and eventually a really good risk reward point will present itself.