S&P 500 - March 16, 2009

charts courtesy of stockcharts.com

A reversal day!

The Bear is back!

Young bull is dead on Arrival!

I can imagine many, and many bears thinking along the lines above. Maybe it is the return of the bear that we noticed today, but my job is not writing sensational headlines. My job is to try to identify a decent move and squeeze a buck or two if could.

So let’s just do that.

Finally we got a pullback, and yes, a dramatic pullback. But that happened after a very strong move that had taken the index from deeply oversold levels on a daily frame to somewhat overbought readings. All in one go and without a pause

Notice that we have to go back as far as July to spot a similar move. I am not saying that we are going to repeat what happened in July. I am just going back to see when we saw a similarly strong run.

Also, notice that index hit the neighborhood of what we circled yesterday (770 area and the down-sloping line) and then pulled back. Neat, eh?

Also, notice that the technicals have not broken in any way on the daily chart.

Volume expanded, and breadth eased.

In fact, during the morning session, intraday breadth measures were broadly positive. They ebbed as the afternoon session unfolded

We had identified the tight price action as a sign of a strong move being near its end, but the move was stronger than anything I had expected.

Let’s look at the rally in its entirety

Technically, this is a very strong, impulsive move. I don’t care how self-entitled perma-bears feel.

Can I label it as a correction? Of course, I can, and that’s why we have so far said that it could either be the 1st wave of a rally, or the 4th wave of the ongoing decline.

But because of the strength of the move, it is upon the bears this time to prove that they have not fallen into hibernation.

We need to see how this market pulls back. Here’s the 15-minute chart with some possible retracement levels

It will be only with a 15-minute close below 740 area that the index will reverse its current series of higher lows. That will not necessarily mean a return of the bear but it will be warning signs.

On the other hand a pullback to 717-720, or even to 707 can be viewed as a normal wave 2 retracement.

Yes, I know, it is not easy for those who went long in the second half of the up move.

If index does not do a meaningful retracement soon, I would be really concerned and wary of the bears regardless of how insanely they growl. To put it bluntly, If we have finished wave 4 (or any corrective wave), and are now on wave 5 down (or any impulsive wave down), I will want to see a quick drop—dilly dally sideways is not good enough for me, and I will stand aside and observe, or join the bull party if the index powers on.

To wrap it up:

It’s a quadruple witching week, tread with care! Index stalled (at least for now) just above 768 pivot. Resistance is 768 area, and then 789. Support is coming at 750, 743, and 733.