Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

Ray of hope for the bear case? Squeeze Over!

http://www.prudentbear.com/bearschat/bbs_read.asp?mid=
279836&tid=279836&fid=1&start=101&sr=1&sb=1&snsa=A#M279836

I see what everyone sees: the market is ramping higher led by the NDX. Now all the bulls (and most of those who had turned bearish) are scanning charts for long plays. And they may be correct in thinking a new leg up in the bull market from 10/02 is dead ahead.

Summer rallies aren't rare and some of the most vicious occur during years that aren't otherwise considered bullish (1929-30% gain b/w Jun-Aug, 1987-21% gain from May-Aug, 2000-16% gain from June-Aug).

That said, the action in the NDX and the VXN is intriguing when you look at last year. In 2004, there were three separate vertical 10% rallies in the NDX:

---Mar/Apr, 9 days, 10%
---May/June, 16 days, 9%
---Aug/Sept, 11 days, 10%

The current rally off the Apr 29 lows has taken 16 days and moved the NDX up 9.5%.

The first two 2004 rallies ended right there or thereabouts and led to sharp reversals to new lows. The May/June pole rally ultimately led to an additional 2% gain over 3 weeks before reversing.

The third 10% vertical rally was the real deal and ultimately led to a 25% gain over four months (Aug-Dec). But not before pausing and chopping for 17 days right after the vertical initiation rally.

So there is some evidence that furious NDX rallies are not necessarily indicators of more upside to come. Often just the opposite. Some are saying that we were historically oversold and sentiment too bearish. But if you remember last May, we were far more oversold and the vertical 10% NDX rally off the May lows led to lower lows in July and Aug.

Additionally, take a look at the VXN (Nazz volatility). It made a new all-time low yesterday. If you look at a VXN chart since 3/04, you'll notice that the VXN keeps making lower lows. Those spike lows form a pretty nice trendline. Every time the VXN had touched the bottom trendline since 3/04 (it has happened in 3/04, 6/04, 12/04, 3/05), it has marked the end of a rally. Not the end of the beginning, but the actual end of the rally.

We are very close (1-2% away) from touching the bottom trendline yet again. So if the past year+ is any guide, we should be at the end of this rally.

For a good chart of this phenomenon, go to this link and see how the lows in VXN line up with the highs in the NDX:

http://members.cox.net/dcengr/5-20-05.JPG


I'm not trying to look for the bear case where it doesn't exist. And the examples from the past year may no longer be applicable. But should the market turn down here instead of going up further, there are certainly signs to support such a reversal.

And either way, given the current 10% vertical NDX ramp and how it coincided with opex, a pause is in order no matter if we reverse right here or go on to new highs.