Has the Worm Turned? Rally Time.

I remain strongly biased towards believing that the S&P has formed a 5 year rising wedge that will result in a serious correction.  However, the market’s behavior this past Thursday and Friday leads me to believe that we will rally from here.  I don’t know if it’s days or weeks or months, but I imagine we will likely hit new highs.  If we don’t, that would confirm to me that a major breakdown is likely at hand soon.

As with the shallow bottoms of both April and August, small caps and volatility turned more bullish before the larger indexes, leading the way higher.  Thursday’s reversal and Friday’s rally put a bullish candlestick on the weekly chart (and daily chart, Thursday).  If a rally is to follow, we should see upside follow through by Wednesday or Thursday of this coming week.  Here is the weekly chart of S&P Futures:

2014-10-03-ES-ST_CHARTS

Here is the doji star reversal pattern we find in the IWM small cap ETF.  We saw similar bullish reversal candlesticks in both February and April.

2014-10-05-IWM-ST_CHARTS

Despite my view that we will turn lower in the mid/long-term, I am now positioned bullishly for the short term.  We’ll see how that goes…

***UPDATE 10/7 – So far, some pretty serious selling pushing S&P to retest lows.  No upside follow through so far.  Chris Kimble pointed out breakdowns in other global markets.  U.S. may finally be following suit, which would mean more downside is likely to follow.  I have closed long positions and am back to being short – though nowhere near as short as I would like to be if there is a confirmed breakdown in SPY.

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