How Long Can This Fragile Rally Last?

Markets soared yesterday following a united attempt by six central banks to provide more dollars at a lower price to their banking systems. AndChinaannounced that they were cutting reserve requirements for their banks, which is interpreted as giving up the fight on inflation in favor of stimulating their economy.

Despite the obvious admission that other policies were failing and something dramatic had to be done to thwart a worldwide economic failure, stocks had their best session in two-and-a-half years.

The Dow Jones Industrial Average rose 4.24%, the S&P 500 gained 4.33%, and the Nasdaq jumped 4.17%. Volume was high with almost 1.7 billion shares trading on the NYSE and 847 million on the Nasdaq. Advancers exceeded decliners by 6.75-to-1 on the Big Board and 4.63-to-1 on the Nasdaq.

Despite yesterday�s big percentage moves, the major indices are still within right triangle bearish trading patterns. The S&P 500�s reversal on Monday establishes the lower boundary of a huge right triangle with resistance at the 200-day moving average at 1,265 and support at 1,158. Following yesterday�s huge rebound, the initial support is now at 1,220.

Click to EnlargeClick to Enlarge

Dow Theory purists will note that the bear market pattern of lower highs and lows on the Dow industrials and transports have not changed. The industrials have, however, penetrated their 200-day moving average — a positive. And despite the buy signal from the stochastic, the bear is still in the field.

For the first time in many years, the 17-month moving average of the S&P 500 issued a buy signal within just two months of a sell signal. This occurred because of the extreme volatility of the world�s stock markets and the unusually unstable economic situation inEurope.

Conclusion: A highly dangerous economic situation was temporarily avoided when the major world powers agreed on a package of unusual joint decisions with their banking systems. This occurred as the financial world was becoming aware of a potential global collapse, so the headlines-sensitive stock market exploded with relief yesterday when the central banks took action. But the extreme and unusually cooperative actions reveal the fragile condition of the markets, so it is likely that yesterday�s rally could be short-lived.

For now, it is best to stand aside (or play this volatile market with options). The bear is still roaming and further headlines could lead to even more volatile days ahead.