Analyzing yesterday’s [Wednesday] activity two things jumped out first, after a recent aggressive multi-day sell off (and multi-week for that matter) the market could not hold on to a lousy 240 point gain, shaving off 100 Dow points in the last 1/2 hour. Second, was that the internals on the move were average, not stellar, with NASDAQ up to down volume very good at 4.75:1 but its advance decline ratio only registering a 2:5 to 1 ratio. On the NYSE the ratios were as bit better at 2.53:1 and 4:29 to 1 respectively.
However neither of these were what we would expect to see on a rally cementing a low, rather they were numbers that looked more associated with short covering and trader interest (not investor interest). Typically on days in the past that have been up real thrusts (bottom confirmation days) off real lows the up to down volume ratios are closer to 10:1 or greater with accompanying advance to decline ratios of at least 5:1.
When people are looking for lows or so afraid of missing the bottom (or a rally) then you can almost always count on it not being the real deal. Real rallies start when all hope is lost and investors become mentally worn out from calling for the bottom (so often) and being wrong that they finally stop trying.
Any rally at this point is an opportunity to make some short-term trading profits until market breadth stats improves measurably.
Source: Kevin Lane, Fusion IQ, March 5, 2009.