Thursday's session is exactly why many people were trying to stick with the market even as it was drip dropping away for 3 weeks. Throughout 2013 (and late 2012) whenever the market looks ready to roll over, a news event comes out and we see a sharp rally to the upside. This time everyone was anticipating it, because the politicians always blink - it was just a matter of timing. This is why until earlier this week the market was selling off in slow motion, as people did not want to miss a move like today; but as usual the market inflicted enough punishment just ahead of this rally to cause some serious pain and/or generate a lot of stop loss orders to hit. While the ferociousness of today's rally was surprising, the fact it happened after politicians appear ready to kick the can down the road again is not a surprise. The S&P 500 gained 2.18% and the NASDAQ 2.26%. This was the second best session of the year and was VERY similar to the first day of the year when the fiscal cliff can was "kicked", and it led to a massive rally on ay 1 of 2013.
House Speaker John Boehner said the GOP would offering a temporary increase in the debt ceiling in return for discussions with President Obama on other budget and deficit issues.
It is important to note that technical analysis provide a framework of probabilities. However, news trumps everything. With the S&P 500 and NASDAQ we had broken KEY long term support Tuesday and Wednesday. However everyone knew at the time an agreement was reached there was a high probability of a sharp relief rally. In this case there has not even been an agreement between the politicians, just talk of it - and that was enough to singe bears. Definitely not an easy thing to react to if you honor the charts of the indexes. With the S&P 500 we went from a breakdown to a clearing of the descending channel - all in 1 session. Now the question is, do we repeat the recent pattern of just going straight up with no rest for a few weeks as has happened the last few times we emerged from this pattern. Dip buyers have been trained to chase chase chase all year.
The NYSE McClellan Oscillator saw a huge jump from near -60 to near -10.
We said a few times bulls do not want to see the volatility index "break out" - HOWEVER, whenever there is a turn in the politician negotiations this index could be prone to be crushed. That happened today.
After 3 horrible days of breadth, we had one of the best breadth days of the past few months.
Emerging markets continue to be an area of relative strength as some people try to avoid the mess that is the U.S. political system
One sector we want to focus on are the biotechs, because these have been leaders all through 2013. There are 2 ways to look at Wednesday's session - there was a selloff on HUGE volume. One can say that was a washout short term, or one could say that is a negative sign over the intermediate term. Both could actually be correct but we'll see over the coming week or two what happens here. If the overall market just rallies straight up for 5-6 weeks as it usually has done in QE markets once a bottom is in, then Wednesday's session will just be seen as a bottom where people threw in the towel.