Stocks Rally on Downward Revision to Second Quarter GDP

| August 27, 2010

The “sell the rumor, buy the news” rally that we suspected would provide the catalyst for the formation of the latest short-term cycle low (STCL) in the S&P 500 index developed as anticipated today, and it is now very likely that the expected low occurred yesterday.

Stocks will need to exhibit additional strength over the next few sessions in order to confirm that the latest STCL is in place. To be clear, we do not expect a strong, sustained rally to develop off of this short-term bottom. At the moment, the most likely scenario that we are tracking would involve one to two weeks of sideways consolidation with a slight upside bias followed by a return to the long-term low near 1,022.

It is important to remember that the daily chart provides short-term forecasts only, and just because a new STCL has likely occurred, it is not necessarily a bullish signal. The massive topping formation on the weekly chart continues to suggest that a breakdown to new long-term lows is likely sometime over the next two to four weeks.

Category: Commentary, Market Update

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