Stock market posts a bullish follow through day

Despite yesterday's huge selloff, the market's internal action still points to higher prices over the coming weeks. So far, it looks like we may get a rally similar to the March-->May 2008 period, which means choppy trading in both directions, shaking everyone out. I last posted about SPX here.

Notice on the daily chart (above) that MACD divergence is confirmed. This is similar to the divergence which formed between 1/22/08 and 3/17/08 (which preceded a two month rally). Also, today was a bullish follow-through day because the SPX rallied more than 1.7% on higher volume than yesterday. According to William O'Neil (Investors Business Daily), this increases the likelihood that the rally from 740 has staying power.

Yesterday's drop was also a nice bull-breaking correction. One would have expected to see massive volume, but instead it was below average and just slightly higher than Wednesday's pre-holiday volume. It seems that it was meant to scare bulls before prices resumes uptrending.

On the 1h intraday chart, notice that the rally from 740 was in 3-waves and the drop from 898 was also in 3-waves. This kind of confusing action looks like it's part of a correction. It means price should stay above 740, but at the same time, it will be choppy to confuse both sides of the market. If we can rally to above 900, a very nice head and shoulders pattern will be complete, which should lead to more gains (perhaps 975-1000).