Rallies after short-term dips making bears cautious

10/22/2009 10:39 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

It's drops like we had at the end of the day on Wednesday followed by rallies like we had on Thursday that are keeping bears from launching a major attack on this rally.

Wednesday's sell off at the end of the day looked like it might lead to a big enough drop so that bears could make some money shorting the market, according to Arthur Hill writing the Market Message on StockCharts.com.

The Standard & Poor's 500 ETF (SPY), which tracks the S&P 500 stock index, broke below a prior low in the closing hours on Wednesday. That sent out a technical signal that the market was headed to a short-term sell off.

But any bear who put money on that drop got sent to the cleaners on Thursday when the market moved back above the broken support level.

Moves like this convince bears that the uptrend is still intact and keep them on the sidelines when the market momentarily stumbles. That in turn makes it less likely that a stumble will generate enough selling pressure to turn into anything like the correction that so many traders are looking for in the near term.

Calling a turn in the trend is really, really difficult. And can get very expensive if you get it wrong. Get burned often enough and you become reluctant to take a chance on the downside. That adds just a little bit of extra life to a rally that everyone knows is getting very long in the tooth.

Trends continue until they don't. Not very useful as a piece of investing strategy but true none the less.
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