Bear Market Counter Trend Rallies

During the bear market after the 1929 crash in the Dow, we had at least 5 counter-trend rallies, the first is always the strongest as it seeks to cause doubt, sucker in longs, squeeze out shorts and make the most amount of people wrong at any one time. They blur the line between a bull and bear market and cause uncertainty, they are designed to do that and to do that, they have to be convincing.

In a little piece I lifted from another site, the bear market counter trend rally is addressed.

"Roughly a century ago, a notorious Chicago con man was asked who his favorite victims were.

 

He named a particular professional group with a reputation for being austere, conservative and cautious.

 

"Why?" asked the interviewer.

 

"Because they think they're so damn smart," came the reply.

 

In a bear market, big countertrend rallies are like that con man. They can falsely assure even the most cautious individual. Many investors want to believe. And many succumb.

 

"By the time [particular] rallies in bear markets end, the pessimism that coincided with the first wave lows is reversed to optimism. Investors become convinced that the former rally phase is back on track and the market is heading to new highs."

 

After the Dow Industrials rallied 330 points on Oct. 10, market observers on CNBC were saying:

 

"...the market could potentially explode [to the upside]"

 

"'Hope should keep the market afloat and that suggests a risk-on rally.'"

One of the most notorious countertrend rallies occurred after the 1929 market crash.

After the initial crash, the market rallied 44% only to carry on to make a 90% decline. Fortune were made and lost, one of the most notorious was the fortune made by Jesse Livermore. Jesse came from humble beginnings but during the 1929 bear market had made over $100 million dollars (in 1929) selling the market short and holding to his convictions. JP Morgan (the man) had to step in to avert a total financial system collapse as well as the collapse of the NYSE, but he could only do it after he pleaded with Livermore to cover his shorts.

Most of what you see in the market is a deception, that's the simple truth.

Here is a chart I've posted a lot lately, hopefully it helps you keep your eye on the forest.

 The bear market rally in 2008, which is very similar to market conditions since August of 2011 through the present.

This is today's action, a lot different then yesterday's F_O_M_C knee jerk reaction that I warned about.

Is this the absolute top? Of course only history can answer that question, but if you ask me if this has been a bear market counter trend rally, I would say YES and that is not a gut feeling, it is based on hundreds of observations.

Nobody ever said trading was easy and this has been one of the most insane markets anyone can remember, however as I said in a 5 part video series I recorded in 2007 when CNB was still screaming "DOW 20,000!", this is likely going to be one of the worst bear markets the world has ever witnessed and in that there is great opportunity. 

If making money in the market was easy, there would be no Wall Street firms raking in hundreds of billions of dollars and producing no tangible product. It's a zero sum game.