Gann Global Financial

The price pattern of the Stock Market has diverted from what would be a direct parallel to the Great Depression legs down. Any time the market diverts from what we call our “closest fit” parallels to history, that puts a check in our spirit.

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Stock Market Diverts from Great Depression Precedents

We need to wait and watch because the stock market is doing something that is contrary to a pattern it had been following relative to the Great Depression.

Recently, the stock market indexes have experienced a very sizable rally. The violence of this rally has been greater in terms of percentage retracement than what would have been expected. These are factors that we are taking into account, and obviously we don’t want to do anything in the stock market until we know that the probabilities are in our favor. At this point, I am viewing it from a neutral standpoint. What I find quite remarkable is the relative strength that we have seen in the NASDAQ, the tech sector, relative to the Dow and the S&P.

The NASDAQ has traded to within a fraction of the January 6th high. This past week we hit 1281.75 having held the November 21st low which was broken by the Dow Jones and the S&P 500. In fact, the November 21st low was broken decisively by both the Dow and the S&P 500.

Our expectation was that the market had the potential to continue to move lower, and that we had hit a trigger point where sell orders could have overwhelmed the market, in our estimation, and resulted in the S&P dropping very quickly to the 600 level. As it turned out, the cash dropped to about the 666 level, immediately reversed to the up side, regained last year’s lows from November of 2008, regained the October of 2002 bear market lows, and simply surged off the lows, very similar to what occurred here in the NASDAQ. That was unexpected from my vantage point.

Surprises like that check me. This stock market moved into new lows, into no-man’s land.  So, someone was buying at those lows. At this point, I have to assume that it was possibly smart money.

NASDAQ Rally

The NASDAQ established a third lower top off this January high. Now this was the bear market rally in the S&P 500, so we will look at the comparable rally. At 934 basis the nearest futures, 943 basis the cash. As of the capture on this chart, we were at $7.99, and I believe we are at $8.08 as we move towards the twelve o’clock hour.

S&P Well Off the January High

So, we decisively broke the November low in the S&P 500 and Dow Jones, but the NASDAQ showed a bullish divergence that would be confirmed by a rally to new highs.

Our “Rule of 4″ is this: when a market moves to an old high or an old low for a fourth time, it generally follows through.  So I we are looking at the NASDAQ right now with the expectation if we push up toward these highs, that we would push through those highs and possibly go to a new high. On that basis there is a very real prospect the NASDAQ established a final low as of November 21st, experienced a first leg up as of January 6th, a bull market correction into a higher bottom on March 9th, and the start of a second leg up in a bull market.

This is not my expectation at this point, but I can say that the technicals are certainly starting to suggest that the bull side of the equation is valid. This is especially going to be true on a rally above this 1287 level, which I would have to expect at this point in time because there are going to be a lot of buy stops building above that level. We have in a sense a two-tiered market. We have the tech market versus the larger equities in the S&P 500, and so it is something of a tug of war, and we will see how this plays out.