Full Moon Failed Breakdown Reversal!

Do you believe me now about failed breakouts? Its really incredible to see technical analysis work so well sometimes. After breaking those October lows the market reversed and exploded higher.

One reader had a nice metaphor for today's action in saying that "stocks rocket up their rears as they fell off the cliff and ignited the rocket midair." This was precisely the action I cautioned about last night when I said to "be aware that if a breakdown reversed it would also turn out to be a powerful move back up, so stops are essential either way you play this." I feel more confident than ever that the bottom is in for 2008.

I also wanted to point out a few other indicators that support the notion for a bottom in stocks aside from the obvious reversal candlestick today. First is the divergence in the VIX. Despite most stocks having made new lows today, the VIX made a significantly lower high:

Note that the divergence in the RSI and CCI on the VIX and especially note that the CCI flipped back below zero again. If the VIX were a stock I'd be shorting it right now, itjust needs to break that 50 dma to confirm the intermediate term downtrend. And its the same story with the put to call ratio, positive divergence over the past month (lower highs despite stocks making a lower low):

And perhaps the most compelling indicator of all is the extreme divergence in the new highs-new lows index. It made an all time low of -2477 at the October low but has managed to climb back to roughly 600 since. This demonstrates that the underlying market technicals have dramatically improved since the October lows and also that we saw a historic level of panic last month that we were no where near today (despite lower prices breifly today). Try plotting this on a longer term chart and you will find that downward spikes match up precicely with major market lows and you will also notice that the October spike down was much, much greater than any before it.

Finally, these are crazy times and in crazy times people will look for anything they can to find order amidst the chaos. One strategy I heard nothing about in the bull market (because its silly) but have heard alot about recently is the use of astrology in technical analysis. That is, basing investment decisions on the phase of the moon, planets and stars. Believe me or not, it is becoming increasingly popular to connect the cycles of the stock market to the cycles of the moon. Now I wouldn't put much weight in this other than that over the past few weeks I have heard some highly accredited investors (Art Cashin and Robert McHugh among others) say that today would be the day of the market bottom based on today's full moon (and other things of course). Well, needless to say those people were vindicated with today's epic full moon failed breakdown reversal. I think we all owe the moon a round of applause, go moon!