Will this ‘Gutless’ Bounce Morph into Another Endless Rally?

The rally from the August 7 low has been lethargic, gutless (based on internal measures of demand) and relentless. Will it also be endless? Here’s a look at the rally’s weak foundation and possible up side target.

Uninspired, lethargic, gutless and breadth-less. Any of those four adjectives describes the S&P’s rally from the August 7 low (based on measures of internal demand up until August 15).

Nevertheless, the very same rally has also been relentless.

The rally itself is no big surprise. The August 6 Profit Radar Report listed five reasons why stocks should rally (equity put/call ratio, IWM:IWB ratio, XLY:XLP ratio, close proximity of critical support, and Elliott Wave Theory).

The August 10 Profit Radar Report followed up the August 6 assessment with the chart below. It showed the two most likely forward-looking scenarios.

One projection (dashed yellow line) was to lead straight to new highs, the other (solid yellow line) pointed to 1,948 – 1,973 followed by another leg down. Both projections were short-term bullish.

The August 13 Profit Radar Report observed that: “The rally from last week’s low has been lackluster. Such lack of conviction normally results in another leg down. However, we saw a similar lackluster bounce in April morph into the momentum rally that ultimately culminated in the July highs.”

Never mind the initial lackluster nature of the current bounce. Monday’s increase in demand, buying power and conviction lifted the S&P 500 (NYSEArca: SPY) above the 1,948 – 1,973 zone and increased the odds of new all-time highs for all major indexes.

A new all-time high is probably the minimum up side target, with significantly higher potential thereafter. The biggest problem for the bullish technical developments is less than bullish seasonality (at least until September) and bullish VIX seasonality (which will resume in about a week).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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