Yesterday, the increase was 11.37%, the biggest daily gain since 1933, when Congress finalized a safety net designed to fight the economic tsunami expected from the COVID-19 pandemic: an unprecedented value of $ 2 trillion.
After the Dow plummeted 37% since the February 12 peak, the index suddenly resembled what everyone wanted for Christmas. So, is the bear market over?
People have compared the current collapse to the crash in 1987. Would that mean that from now on we are on our way to continuing meetings, as happened then?
We don't think so. Today's situation is very different. There is still no vaccine or cure for the coronavirus, despite the concerted global effort to find one – and it will likely take a while to develop one.
Indeed, the graph below clearly illustrates that the patterns have not changed significantly despite yesterday's wave.
Dow Jones daily chart
The Dow Jones drew a downward trend, after posting a series of declining highs and lows, below Feb 28, 24,681.01 low.
As we've noted a number of times, freely traded assets don't move in straight lines. They fluctuate between relatively smaller gains and losses according to different stages of portfolio management within the larger trend. Yesterday's historic rally is considered a corrective rally within a downward trend.
While the fundamental story was the expected political breakthrough for the largest stimulus spending ever, engineers backed it up and prices rose from the 2016 highs.
The first downward movement from the February 12 peak to the February 28 low, a 16.5% slump, including intraday price action, was followed by a corrective rally of 9.8%. That means the longer and larger movement, the drop of 32.8% from the March 4 high to the March 23 low, is expected to be followed by a corrective rally.
So where does that leave us? According to the principles of technical analysis, working on the basis of weight of evidence, we remain in bearish mode as long as the downward trend is present. It will not be over until the price returns to rising peaks and troughs.
For short-term traders, the hourly chart develops a H&S bottom as seen below:
Trading Strategies
Conservative traders would wait for the corrective turnout to run out, followed by a bearish pattern.
Moderate traders risk a short position when the price returns to the downward trend line.
Aggressive traders can take part in the corrective rally after the hour chart has established its own short-term upward trend, with two rising peaks and troughs, which could take the form of an H&S bottom. So far it has registered one peak and one trough.
Trade Example
Entry: 20,500 (see note below)
Stop Loss: 20,000
Risk: 500 points
Target: 22,500
Reward: 2000 points
Risk: Reward Ratio: 1: 4
Note: Entry at 20,500 – after retreating to form another shoulder, forming a second trough before posting the short-term peak upward trend.
