So is this the rally that begins from the massively oversold position? Let us begin with the point and figure chart. The market moved 6 boxes down from 80 to 75 and rallied 3 boxes up. Entirely normal. In fact the bounce came exactly where one would expect off the old lows.
Now lets look at the daily chart. Today was an inside day. We rallied to close near the high on higher volume and a decreased range compared to yesterday. In other words although this very easily could be the beginning of a reversal in trend, the resistance to the upward move today was greater than the resistance to the downward move yesterday. Yesterday we went down easy compared to today.
Finally lets turn to the intraday chart, this time of the futures, because it is easier to label.
After opening higher we fall on high, climactic, volume to 1. This exhausts the supply as shown by the decreased volume with the high end close at 2 and the black bar immediately after 2. The lack of supply triggers buying and short covering leading to the sharp rally ending at the blue resistance line. Demand takes a breather and prices fall on diminished spread and diminished volume to the spring at 3. The low at 3 coincides with the point where demand kicked in 2 bars after 2. Double click the chart to enlarge it. The bar after 3 is a decline that failed due to lack of supply and that triggers an uninterrupted rally in black ending in a small low volume reversal bar. No serious selling yet. At 4 the volume and supply have evaporated and the next bar,5, is the widest of the day, going up easily and breaking through resistance. From 6 to 7 we have difficulty advancing despite the strong volume, but the supply drops off rapidly to 8. The bar after 8 advances sharply without the spread of 5 but with about the same volume. 9 shows shortening of the thrust but again selling falls off on the tight reaction to A. The advance to B does not have any of the volume spikes nor the wide ranges of previous advances. The rally is tiring. B to C is the first decline on increasing and increased volume and the advance from C to D is the first advance on large volume that fails to make a new high. Supply is overcoming demand. More selling from D to E.
After 5 the action is characterized by heavy selling into the advance. Thus it is far from clear that the long anticipated rally has begun. Whether the bulls or bears win this small battle is yet to be determined.
ADDENDA: Bar 1, the spring between 6 and 7, and bar 8 are all bars where the market is prevented from going down or having a normal reaction. If one were to manipulate to trigger short covering, say before a President's speech or during the chairman of the Federal Reserve's testimony, this is how one might do it.
