Breakout or Fakeout?

The Dow did an amazing leap of almost 500 points today on aggressive action taken by the US government in order to relieve banks of "toxic waste" and restore credit. The housing market also provided a bullish surprise by turning in a higher than expected existing home sales (see stock market calendar). With news like this, it is not hard for the market to be news driven rather than technical driven. As a result, the classic textbook turn around cease to be so textbook after all. In fact, one of the basic assumption of technical analysis is that it is only reliable until something significant changes. Does these actions and data provide that significant change? The Dow has broken its 7500 resistance level as well as its 50SMA to topside in one fell sweep today... is it a breakout or is it merely a fakeout?

First of all, I am one of those with no doubt that the bottom for this crisis is near and the fact that I have yet to call the completion of the final capitulation scenario which I have been talking about for weeks is because the NASDAQ Composite has yet to make SIGNIFICANT new lows like the Dow and S&P500 did. Yes, the market is always volatile and sideways inclined near reversal points. This is not going to be an exception and the volatile down trend that we have witnessed so far along with the stream of good news hitting the wire daily tells me that something is indeed changing. The question is, is this the breakout that will kill the intermediate downtrend and eventually the primary bear trend?

One fact to recognize about near reversal markets is volatility. Market is going to over-react to a lot of things and that creates a problem in technical analysis... fakeouts. When the market is volatile, prices will frequently dip above and below resistance and support levels due to over-reaction. These fake breakouts are known as fakeouts. In fact, we had our fair share of fakeouts in this crisis so far, the nearest of which is the 50SMA breakout on 2 Jan 2009 which turned out to be one big fake out. So, what does chartists do at this point in time? We wait for confirmation. If this breakout is real, it should find support right at the 7500 line on its retreat, which could happen as quickly as tomorrow. If it does, an intermediate uptrend develops. If it doesn't and the Dow falls right through the 7500 level, the scenario that I have mentioned so far continues.

Yes, this is the 5th wave down and probably the final one and we should see reversal soon... the only problem facing "Wavists" is, is the 5th wave done?

If the Dow fails to make a significant up day over the course of the week, then this is again another fake out. However, even if it does retreat, I still see strong support at the 6500 level, so this is still going to be a volatile and tricky market to trade. In fact, I am currently of the belief that the 6500 level might represent the low of this crisis and that the market would go largely neutral from here and then rally before the end of the year. Why is that so? This is because of all the major programs that have been put in place to cure the economy and investor's reaction to these programs as reflected in the charts so far. However, this is merely my own opinion and as a technical analyst, I would rather wait and see evidence turn up in the charts.