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Reversal of Fortune?

Was that a classic 'capitulation bottom' Wednesday? Thursday's rally seems to support that sentiment.

If this keeps up, Wednesday's midday reversal will go down as one of those classic "capitulation bottoms" that prove to be wonderful buying opportunities. Whether the rally evident today keeps up remains to be seen, of course. But today's gains provide a perfect opportunity to revisit the other half of the story discussed in the

Midday Musings; specifically, the notion that Wednesday's reversal was significantly bullish.


was significant, no question," according to John Bollinger, president of Bollinger Capital in Manhattan Beach, Calif. "The question is whether it has long-term lasting implications."

The session was significant because Wednesday marked a "commodity price reversal," or CPR, in which the major indices made a lower low than the previous day and closed higher than the previous day's close, he said. "It is a classic exhaustion pattern," similar to so-called outside and inside days.

Yesterday didn't qualify as an "outside" day because the intraday high did not exceed the intraday high of the prior day.

Bollinger believes CPRs are more useful than inside or outside days because they occur more often. But they are "all setups for reversals," he said. They also each need confirmation, and yesterday's reversal was confirmed by higher-than-average volume in both

Big Board

and over-the-counter trading.

Going forward from such a session, the technician said you'd want to see a "sign of strength," defined as a day with greater-than-average range and/or greater-than-average price change, accompanied by volume higher than the 50-day moving average.

Today, the

Dow Jones Industrial Average

rose 1.6%, the

S&P 500

gained 1.5%, and the

Nasdaq Composite

climbed 1.1%. At 16.61, the S&P 500's point gain qualified on the greater-than-average gain criteria, topping its 50-day average of 12.90. The spread between the index's high and low was 16.88, topping its 50-day average of 14.50 points, qualifying on the range front as well.


New York Stock Exchange

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trading, 1.5 billion shares were exchanged, exceeding the 50-day average of 1.3 billion. But in over-the-counter trading, 1.75 billion shares were exchanged, shy of the 50-day average of 1.77 billion.

"Not perfect, but better than a poke in the eye," Bollinger quipped when asked if today qualified as a sign of strength day.

Additional evidence supporting the view that Wednesday's reversal augurs better times ahead comes from Peter Eliades at, courtesy of Don Hays at Hays Advisory Group.

On Wednesday, the one-day Arms Index rose above 3.00 for only the seventh time since December 1994. Of the six prior instances, five -- on Oct. 27, 1997, Jan. 9. 1998, Aug. 31, 1998, April 14, 2000, and April 3, 2001 -- occurred on or within one day of significant trading lows for the Dow and S&P.

Who Be Bulls?

Some regular readers of this column are no doubt approaching apoplexy right now, recalling that on

Monday Hays and Bollinger both forecast the market's next move would be higher, rather than the wicked downside action evident on Tuesday.

"Of course, you see why I am sharing this

one-day Arms Index signal with you, since it so perfectly gives support for my expectation of a celebration rally in the weeks ahead," Hays wrote today. "That support was badly needed

after Tuesday. At significant bottoms, so often

the market has to drive the fundamentalists and technicians out, and then it blasts away."

In an interview Thursday, Bollinger also conceded that he too is "looking for positives

as my overall background work suggests this is a positive environment."

But unlike Hays -- who has some big upside targets for the major averages -- Bollinger "has no interest in the market as a whole."

Instead, he retains a long-standing focus on, and optimism about, small- and mid-cap stocks, which he recommends investing in via

iShares, which are index funds that trade like stocks.

For anyone who read Monday's column and translated Bolllinger's optimism into a belief or bet on the major averages or Nasdaq 100, nothing could be further from the truth.

"Yes I'm looking for positives but I'm only positive on the universe I'm dealing with," Bollinger said, noting the S&P 400 MidCap and S&P 600 SmallCap averages remained above their 200-day moving averages even as the so-called major indices slipped below theirs. "I have no opinion on the rest, except possibly as a hedge."

I hope that clears up any confusion.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.