You Must Be This Adroit to Ride This Rally

The "oversold" market combined with the huge bailout efforts from the Treasury and the Fed created the perfect conditions for a bear market rally. The trading operations are setting the trend, which means that when the selling by the institutions starts at higher levels, the large trading outfits will also sell and sell short.

The important thing is to detect when that occurs, and that's where technical analysis comes in. We have a good intermediate-term bottom in the market, but it will not be "the" bottom in the secular bear market. Fundamentally, the greatest negative for the long term is all the counterproductive stuff coming out of Washington.

Below is a chart of the S&P 500 -- note the downtrend line "A" going back to last September was penetrated in mid-March. Then the downtrend line "B" was penetrated. After each of these penetrations, the market pulled back for two days, hitting the line it had just broken. That is bullish technical action. Now the index is battling with trendline "C"; once it is penetrated, we could quickly see the 910 area.

S&P 500 TradeStation

Longer term, there is a positive "falling wedge formation" formed by trendline "A" and line "X" that is bullish. It suggests that the rally will continue, but it won't be a smooth ride. The next target is the 910 area.

FASB Does What It Must

Last week the Financial Accounting Standards Board did what it had to do -- revise the rules for the "mark-to-market" accounting rules. This will take pressure off the banks. Basically, assets banks hold that have no market value can be valued through a cash-flow method. This helped the markets to rally.

There are two positive results to this move: Bank earnings will be improved sharply as the write-downs will diminish, and the danger of the banks violating their capital requirements because of write-downs will subside, thereby taking them out of danger for failure. This rule change was absolutely necessary, and should have been done last year as it would have obviated the need for trillions of dollars in bailouts.

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At the time of publication, JPMorgan was held in some of Dohmen's services.

Bert Dohmen is a professional investor with 38 years of experience in the markets. The observations and important clues he obtains in trading his own portfolios in a wide variety of investment vehicles is of great benefit to all of his clients. He is a trader, not just a writer.

He founded Dohmen Capital Research Institute in 1977 as an economic and investment research firm. Over the past two decades, the firm�s services have achieved the highest acclaim. The firm currently offers 10 services, including a long-term advisory service for the mutual fund investor that helps investors avoid the need for a money manager or financial planner. There are also fax and email services for short-term traders in stocks, options and short sales.

Dohmen�s Wellington Letter has achieved numerous awards of distinction and is read by serious investors, investment professionals and corporate CEOs worldwide.