An Immediate Retest

To continue the thread started yesterday, the question now revolves around “follow through” to Monday’s huge rally. After ending that explosive up move right at the short and medium term moving averages, it became evident early Tuesday morning that the cash S&P rise was “too much too fast” and that an immediate re-test of last Thursday’s low was underway. Yesterday I stated that "Such an occurrence would be a good event for the bulls because not only do I think we would hold but it would strengthen the technicals on the daily chart." Let me explain that further.

Today’s chart not only shows the RSI (top pane) but the Composite Index (middle pane) as well. Note that the RSI is back down into the 40 area. Twice before (marked One and Two on the chart) within the consolidation since the July low has the RSI held 40. Holding 40 in this indicator is the first step in establishing a bull swing.

But holding 40 with technical strength is even better. Although it is hard to see, yesterday’s RSI value is actually a bit higher than at point #2 -- and this with price lower (remember that we use closing prices with these indicators). If price and the indicator were to close up today we would have bullish divergence between price and the RSI and a technical “buy” signal would be put into place.

Furthermore, the composite index is also higher than at point #2 two days ago. This indicates the same type of “potential” bullishness.

As usual the key word here is “potential”. We have to see the bulls hold today and close this market higher. I think they will do it. Let’s see if we can have a successful retest.