NEW YORK (CBS.MW) -- It was close, but a gear change back in October has kept the major market indexes from beginning a reversal at least for now.
If you view the market relative to its low on Oct. 10, then the recent rally was over early last week. Draw a "trendline" connecting the lows of the respective exchange-traded funds (ETFs) on that day with that of the Nov. 19 low for the Dow industrial's "Diamonds" DIA, +0.46% Nov. 13 for the S&P 500's "Spiders" SPY, +0.64% and for the Nasdaq 100's "Qs" QQQ, +0.63% and extend the lines through the present.
From that perspective, the ETFs cleanly broke the uptrend early last week.
But I believe that it was on Oct. 15 that the market really changed gears, and solidified the recent rally. The markets had been in disarray on Oct. 10, springing up from wildly oversold conditions (see Market Snapshot), as traders shot from the hip rather than after taking careful aim.
The next level
The rally entered another level on the 15th when all three major market indexes gapped higher for the second time in three sessions. Not to mention, there was actually some good fundamental corporate news behind the moves (see Market Snapshot). For the Diamonds and the Spiders, the gap placed them well-above their prior highs on Sept. 26 and Oct. 1 (the Qs were already slightly above them).
The index trackers followed up their Oct. 15 surges with pullbacks, but those pullbacks were in themselves bullish in that they stopped on cue at the previous highs (zoom in on interactive java charts of DIA, SPY and QQQ). That's when it became evident that there might be a little more to the gains than just an oversold bounce.
The strength of a rally is determined not just by how it does at resistance, but how it performs during pullbacks to support.
I believe the trendlines most representative of the current rally starts with the low of Oct. 16 and connects with the Nov. 13 lows for the Diamonds and Spiders and the Oct. 29 and the Nov. 11 lows for the Qs.
(See java charts for ETFs. Check off the box marked "Draw trendlines).
The ETFs dipped below even those lines on Friday before rebounding to close above them. Rather than being bearish, the recovery could be considered an example of a bullish "spring" -- sellers fooled by the false-break of support are forced to cover their positions (read more about "springs").
If the "spring" is to be effective for more than a day, the market needs to punish those that sold below the trendline, so they will be reluctant to bet on a downside break again.
If bears are let off the hook, it doesn't matter what gear the market is in -- it will be moving in reverse.
Messengers don't change the message
When I first heard that Treasury Secretary Paul O'Neill was resigning (see full story), the first thing I thought was that it was good for the dollar. He did not respect the foreign exchange hordes, and in turn they did not respect him.
"It is widely acknowledged that financial markets neither liked nor respected Paul O'Neill all that much," said RBS Greenwich Capital economist Steve Stanley. "I doubt that the policy -- which is almost 100 percent hands off -- will change much, but the new Treasury secretary my choose to express the non-policy in a slightly different way that FX traders feel merits a significant move in exchange rates."
On second thought, maybe it's not so good.
The dollar knee-jerked lower after the announcement of O'Neill's resignation -- any kind of disarray or uncertainty is typically bad for a currency. After the market had some time to think about it, however, they realized it wasn't so bad, and the dollar bounced.
But the buck didn't recover what it lost, not like stocks did. That is probably because although the front man changed, the man behind the scenes didn't. And the Bush administration has long been thought to secretly endorse a weaker dollar.
The currency that will likely be impacted the most by a lower dollar is the yen. The currency pair has been a target before, earlier in the other Bush administration (see previous column), and the U.S. has more to gain from a stronger yen -- in terms of trade -- than it does against a stronger euro.
Fundamentally speaking, it's hard to imagine the yen strengthening, given the horrible shape of the county's finances and the seemingly never-ending recession over there. But as we have all learned, FX is not all about economic fundamentals, it's about investment flow too.
With speculators looking one way prior to the weak jobs data and O'Neill's resignation, the dollar rallied to a high of just over 125 yen (zoom in on java chart). If that sounds familiar, it's because it is. The buck topped out there the day before, and a handful of times in mid-October, even while the U.S. stock market was at its best.
Was it just a coincidence?
Whether it was just bad luck that O'Neill's resignation came at just the wrong time for dollar bulls/yen bears, it doesn't really matter. Either way, bulls lost money buying above 125...again.
If a disdain for the 125 level leads the bulls to abandon the rally off the mid-July low, the buck may be in for some real trouble in the form of a long-term "head-and-shoulders" pattern (read more).
If that pattern is ever confirmed, and it's beginning to appear more likely that it will be, it will take a lot more than a new face to restore the bulls' faith (see prior column). And we'll finally get a chance to see if the White House will be happy getting what it wished for.