A strong rebound that changes little

Wall Street has a strong rebound yesterday. From the two charts below, we can see that DJIA & S&P500 have crossed above their respective necklines. Despite the recovery, the initial breakdown below the neckline last week was sufficient to satisfy the minimum requirement of a short-term downtrend, i.e. a lower 'high' & a lower 'low'. What we can hope for is that yesterday's rebound & hopefully further recovery ahead can override this short-term downtrend. The first objective will be to take out the 20-day SMA & 50-day SMA. Since S&P500 closed at 901 yesterday, its 20-day SMA & 50-day SMA are within reach at 905 & 911, respectively. Similarly, DJIA which closed at 8332 could challenge its 20-day SMA & 50-day SMA at 8384 & 8463, respectively. Can they do it?


Chart 1: DJIA's daily chart as at July 13, 2009 (Source: Stockcharts.com)


Chart 2: S&P500's daily chart as at July 13, 2009 (Source: Stockcharts.com)

Note: The break below the neckline of the Head-&-Shoulder formation for both DJIA & S&P500 last week were not accompanied by increased volume. The absence of an increase in volume raised some doubt as to whether we had witnessed a genuine reversal. Since the faster 20-day SMA has already crossed below the 50-day SMA, we can take the reversal as confirmed but unaccompanied by volume. If I may draw an analogy to a scene in a crowded pub where someone has just shouted "FIRE" and only a handful of patrons rushed out. If it is a false alarm, the same handful of patrons would walk back in, looking foolish. If it is a real fire, there would be a mad rush for the door later. So, which is it?