Many modern technicians define a bear market as a market that falls more than 20%. Unfortunately that definition has little predictive value as illustrated by yesterday’s 30-minute shootout that ended in a gain for the major indices. 

Just after the opening, the S&P 500 fell to a new annual low at 1,075, down 21.5% from its high of the year. The press couldn’t wait to announce that a new bear market was now confirmed. What they didn’t know was that the opening dive would, in the last 45 minutes of trading, be countered by one of the most explosive rallies in history and the day would end with the S&P 500 no longer within the range of a bear-market definition. 

The rally produced one of our proprietary Collins-Bollinger Reversal (CBR) buy signals (short term) and very high NYSE volume in the last hour that exceeded 650,000 shares. Yesterday’s total volume was 1.7 billion shares with advancers above decliners on the Nasdaq by 2.75-to-1. It was an amazing display of raw buying power that triggered a rush to cover by the shorts following a late announcement by Europe’s finance ministers that they are looking for ways to recapitalize their banks.

The rally started almost at the midpoint of last summer’s consolidation at S&P 500 1,070 — an objective that was pointed out in Tuesday’s Daily Market Outlook — yesterday’s low was at 1,075. With so much raw power, traders will probably take yesterday’s reversal seriously and the rally will continue, though with some fits and starts.

With a rally in mind, some upside objectives are highlighted on the chart above. The first is the low of 1,114 of Sept. 22, next is the resistance line at 1,160, and finally the 50-day moving average at 1,197.

Conclusion: Yesterday’s dramatic rally appears to be nothing more than a big bounce in a bear market. But it was a powerful bounce from a significant support zone. Thus it will most likely lead to a test of the overhead produced during the last seven weeks that we recognized as a bearish flag. 

Buyers should be very careful and perhaps tie up less cash with options. Large bullish positions could easily lead to another sharp sell-off. We are a long way from being out of the bears’ woods.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.